CONSOLIDATED STATEMENTS OF CHANGES IN ~~SHAREHOLDERS’~~SHAREHOLDERS’ EQUITY

Tectonic Financial, Inc. (the “Company,” “we,” “us,” or “our”) is a financial holding company that offers, through its subsidiaries, banking and other financial services including trust, investment advisory, securities brokerage, third-party administration, recordkeeping and insurance services to individuals, small businesses and institutions ~~in all 50 states. The Company was formed in October 2016 for~~across the ~~purpose of acquiring T Bancshares, Inc. (“TBI”), which acquisition was completed on May 15, 2017.~~United States.

On May 13, 2019, we completed a merger with Tectonic Holdings, LLC (“Tectonic Holdings”), through which we expanded our financial services to include investment advisory, securities brokerage and insurance services (the “Tectonic Merger”). Pursuant to the Amended and Restated Agreement and Plan of Merger, dated March 28, 2019, by and between the Company and Tectonic Holdings (the “Tectonic Merger Agreement”), Tectonic Holdings merged with and into the Company, with the Company as the surviving institution. Immediately after the completion of the Tectonic Merger, the Company completed a 1-for-2 reverse stock split with respect to the outstanding shares of its common stock.

The Company consummated the initial public offering of its 9.00% Fixed-to-Float Rate Series B Non-Cumulative Perpetual Preferred Stock (“Series B preferred stock”) in May 2019 (the “initial public offering”). In connection with the initial public offering, the Company issued and sold 1,725,000 shares of its Series B preferred stock, including 225,000 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares, at an offering price of $10.00 per share, for aggregate gross proceeds of $17.25 million before deducting underwriting discounts and offering expenses, and aggregate net proceeds of $15.5 million.

~~Following the Tectonic Merger, we~~We operate through ~~four~~4 main direct and indirect subsidiaries: (i) ~~TBI,~~T Bancshares, Inc. (“TBI”), which was incorporated under the laws of the State of Texas on December 23, 2002 to serve as the bank holding company for T Bank, N.A., a national banking association (the “Bank”), (ii) Sanders Morris Harris LLC (“Sanders Morris”), a registered broker-dealer with the Financial Industry Regulatory Authority (“FINRA”) and registered investment advisor with the Securities and Exchange Commission, (“SEC”), (iii) Tectonic Advisors, LLC (“Tectonic Advisors”), a registered investment advisor registered with the SEC focused generally on managing money for relatively large, affiliated institutions, and (iv) HWG Insurance Agency LLC (“HWG”), an insurance agency registered with the Texas Department of Insurance (“TDI”).

We are headquartered in Dallas, Texas. The Bank operates through a main office located at 16200 Dallas Parkway, Dallas, Texas. Our other subsidiaries operate from offices in Houston, Dallas and Plano, Texas. Our Houston, Texas office is located at 600 Travis Street, 59^th Floor, Houston, Texas, and includes the home offices of Sanders Morris and HWG, as well as Tectonic Advisors’ family office services team. Our other Dallas office, which is a branch office of Sanders Morris, is at 5950 Sherry Lane, Suite 470, Dallas, Texas. Our main office for Tectonic Advisors is in Plano, Texas at 6900 Dallas Parkway, Suite 625, Plano, Texas, and also includes a branch office of HWG.

The Bank offers a broad range of commercial and consumer banking and trust services primarily to small- to medium-sized businesses and their employees, and other ~~institutions.~~institutions, and The Nolan Company (“Nolan”), operating as a division within the Bank, offers third party administration (“TPA”) services. The Bank’s technological capabilities, including worldwide free ATM withdrawals, sophisticated on-line banking capabilities, electronic funds transfer capabilities, and economical remote deposit solutions, allow most customers to be served regardless of their geographic location. The Bank serves its local geographic market which includes Dallas, Tarrant, Denton, Collin and Rockwall counties which encompass an area commonly referred to as the Dallas/Fort Worth Metroplex. The Bank also serves the dental and other health professional industries through a centralized loan and deposit platform that operates out of its main office in Dallas, Texas. In addition, the Bank serves the small business community by offering loans guaranteed by the U.S. Small Business Administration (“SBA”) and the U.S. Department of Agriculture (“USDA”).

The Bank offers a wide range of deposit services including demand deposits, regular savings accounts, money market accounts, individual retirement accounts, and certificates of deposit with fixed rates and a range of maturity options. Lending services include commercial loans to small- to medium-sized businesses and professional concerns as well as consumers. The Bank also offers trust services. The Bank’s traditional fiduciary services clients primarily consist of clients of Cain, Watters & Associates, ~~L.L.C.~~LLC (“Cain Watters”). The Bank, Cain Watters and Tectonic Advisors entered into an advisory services agreement related to the trust operations in April 2006, which has been amended from time to time, most recently in July 2016. See Note ~~13,~~12, Related Parties, to these consolidated financial statements for more information.

In ~~January 2019,~~addition, the ~~Bank acquired the assets of The~~ Nolan ~~Company (“Nolan”), a third-party administrator (“TPA”), based in Overland Park, Kansas. Founded in 1979, Nolan offers TPA services as a~~ division of the Bank offers TPA services and provides clients with retirement plan design and administrative services, specializing in ministerial recordkeeping, administration, actuarial and design services for retirement plans of small businesses and professional practices. ~~Nolan has clients in 50 states and is the administrator for retirement plans. Approximately half of the retirement plans are serviced by our trust department.~~ We believe ~~that the addition of~~offering TPA services allows us to serve our clients more fully and to attract new clients to our trust platform. ~~Please see Note 18,~~ ~~Nolan~~ ~~Acquisition~~, ~~to these consolidated financial statements for more information.~~

Basis of Presentation. The consolidated financial statements in this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2021 (this “Form 10-Q”) include the accounts of the Company and its wholly owned subsidiaries, TBI, the Bank, Tectonic Advisors, Sanders Morris, and through Sanders Morris, HWG. Prior to the Tectonic Merger, Sanders Morris and Tectonic Advisors were wholly owned subsidiaries of Tectonic Holdings, which was under common control with the Company. The Tectonic Merger has been accounted for as a combination of businesses under common control in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, ~~Transactions Between Entities Under Common Control.~~ Under Topic 805, all the assets and liabilities of Tectonic Holdings are carried over to the books of the Company at their then current carrying amounts, and the consolidated financial statements, including our earnings per share calculations, have been retrospectively adjusted to reflect the effect of the Tectonic Merger. This includes the acquisition of Sanders Morris, HWG and Tectonic Advisors described below under Note 2, ~~Tectonic Merger and Initial Public Offering of~~ ~~Series B Preferred Stock~~, for all periods subsequent to May 15, 2017, the earliest date at which the entities were under common control. Therefore, the consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the three months ended March 31, 2019, although the period falls prior to the Tectonic Merger, represents the combination of the results of operations of TFI and Tectonic Holdings. In addition, allsubsidiaries. All intercompany transactions and balances are eliminated in consolidation. In addition, the computation of all share and per share amounts in this Quarterly Report on Form 10-Q (“Form 10-Q”) have been adjusted retroactively to reflect the reverse stock split, which the Company completed immediately after the completion of the Tectonic Merger.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the SEC. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, ~~2019~~2020 in the audited financial statements included within our Annual Report on Form 10-K ~~(File No 001-38910),~~for the year ended December 31, 2020, filed with the SEC on March 31, ~~2020 (“~~2021 and amended on Form ~~10-K”).~~10-K/A on May 5, 2021.

In the opinion of management, all adjustments that were normal and recurring in nature, and considered necessary, have been included for the fair presentation of the Company’s consolidated financial position and results of operations. Operating results for the three and six months ended June 30, ~~2020~~2021 are not necessarily indicative of results that may be expected for the full year ending December 31, ~~2020.~~2021.

In December 2019, a novel coronavirus (“COVID-19”) was reported in China, and, in March 2020, the World Health Organization declared COVID-19 to be a global pandemic, indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal

Although the Company’s current estimates are based on management’s evaluation of current conditions and how we expect them to change in the future, due to the impact that the COVID-19 pandemic has had on financial markets and the economy both locally and nationally, it is reasonably possible that the COVID-19 pandemic could materially affect these significant estimates and the Company’s results of operations and financial condition. See Part II, Item 1.A. “Risk Factors” of this Form 10-Q.

The Company is working with customers directly affected by the COVID-19 pandemic. The Company has been and continues to be prepared to offer short-term assistance in accordance with regulatory guidelines. Should economic conditions worsen, the Company could experience further increases in its required allowance for loan loss and record additional provision for loan loss expense. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of the COVID-19 pandemic are prolonged.

In addition, the effects of the COVID-19 pandemic could cause what management would deem to be a triggering event that could, under certain circumstances, cause us to perform goodwill and intangible asset impairment tests and result in an impairment charge being recorded for that period. As of June 30, 2020, we determined that such impairment tests were not necessary.

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period, as well as the disclosures provided. Actual results could be significantly different from those estimates. Changes in assumptions or in market conditions could significantly affect the estimates. The determination of the allowance for loan losses, the fair value of stock options, the fair values of financial instruments and other real estate owned, and the status of contingencies are particularly susceptible to significant change in recorded amounts.

Accounting Changes, Reclassifications and Restatements. Certain items in prior financial statements have been reclassified to conform to the current presentation.

Earnings per Share. Basic earnings per share (“EPS”) is computed based on the weighted-average number of shares outstanding during each year. ~~The computation of all share and per share amounts in this Form 10-Q have been adjusted retroactively to reflect the reverse stock split.~~ Diluted EPS is computed using the weighted-average shares and all potential dilutive shares outstanding during the period. The following table sets forth the computation of basic and diluted EPS for the following periods:

As of June 30, ~~2020,~~2021, options to purchase ~~190,000~~117,500 shares of common stock, with a weighted average exercise price of ~~$5.37,~~$4.30, were included in the computation of diluted net earnings per share, and options to purchase 72,500 shares of common stock, with a weighted average exercise price of $7.10, were excluded from the computation of diluted net ~~EPS~~earnings per share because their effect was anti-dilutive. In addition, as of June 30, 2021, 210,000 shares of restricted stock grants with a grant date fair value of $4.81 per share which vest from 2023 through 2025 were included in the diluted earnings per share calculation.

Note 2. ~~Tectonic Merger and~~ ~~Initial Public Offering~~ ~~of Series B Preferred~~ ~~Stock~~

On May 13, 2019, the Company completed the Tectonic Merger pursuant to the Tectonic Merger Agreement. In the Tectonic Merger, each common unit of Tectonic Holdings outstanding immediately prior to the effective time of the Tectonic Merger was converted into one share of Company common stock, and each option to purchase one Tectonic Holdings common unit was converted into an option to purchase one share of Company common stock. Immediately after the completion of the Tectonic Merger, the Company completed a 1-for-2 reverse stock split, which left 6,568,750 common shares issued and outstanding as of May 14, 2019. The computation of all share and per share amounts in this Form 10-Q have been adjusted retroactively to reflect the reverse stock split.

As a condition precedent to the Tectonic Merger, immediately prior to the merger, approximately $8.0 million of Tectonic Advisors subordinated debt held by Dental Community Financial Holdings, Ltd. (“DCFH”), an entity that has as its general partner a corporation owned by one of the directors of the Company, was converted into 80,338 non-cumulative, perpetual preferred units of Tectonic Holdings (“Tectonic Holdings preferred units”).

In the Tectonic Merger, each Tectonic Holdings preferred unit was converted into one share of 10.0% Series A Non-Cumulative Perpetual Preferred Stock of the Company (“Series A preferred stock”). The Series A preferred stock ranks senior to our common stock and ~~pari passu~~ to the Series B preferred stock (as defined below) issued in our initial public offering as to dividend rights and rights upon liquidation, dissolution and/or winding up. Dividends will be paid on the Series A preferred stock only when, as and if declared by our board of directors at a rate of 10% per annum (payable quarterly). The Series A preferred stock has a liquidation preference of $100 per share. In addition, the Series A preferred stock is not convertible into any other security of the Company. The Series A preferred stock is redeemable at the option of the Company at any time after the fifth anniversary of the original issue date at a redemption price equal to the liquidation preference, plus any declared but unpaid dividends, subject to the requisite approval of the Board of Governors of the Federal Reserve (“Federal Reserve”), if any. The definitive terms of the Series A preferred stock are subject to the certificate of designation filed with our amended and restated certificate of formation.

On July 12, 2019, the Company repurchased 80,338 shares of its Series A preferred stock, representing all of the outstanding shares of the Series A preferred stock, from DCFH for an aggregate purchase price of approximately $8.0 million. The repurchase was funded using a portion of the net proceeds from the initial public offering.

~~The Tectonic Merger has been accounted for as a combination of businesses under common control in accordance with Topic 805~~. Under Topic 805, all the assets and liabilities of Tectonic Holdings are carried over to the books of the Company at their then current carrying amounts. In addition, the Company’s consolidated financial statements have been retrospectively adjusted to reflect the merger with Tectonic Holdings, including the issuance of the Series A preferred stock in exchange for the Tectonic Holdings preferred units, for all prior periods during which the entities were under common control. All intercompany transactions and balances are eliminated in consolidation.Securities

The balances shown below represent the assets and liabilities of Tectonic Holdings as of the date of the Tectonic Merger, May 13, 2019, that are reflected on the consolidated financial statements of the Company:

On May 14, 2019, the Company completed its initial public offering of 1,500,000 shares of its Series B preferred stock at a price to the public of $10.00 per share. On May 29, 2019, the underwriters exercised their option to purchase 225,000 additional shares of Series B preferred stock at the initial offering price (less underwriting discounts). The initial public offering resulted in net proceeds to the Company of approximately $15.5 million, net of underwriting discounts and fees. The Series B preferred stock began trading on the NASDAQ Capital Market on May 28, 2019 under the symbol “TECTP.” See our IPO Registration Statement, initially filed with the SEC on April 18, 2019.

A summary of amortized ~~cost and~~ cost and fair value of securities is presented below.

Securities available for sale consist of U.S. government agency securities and mortgage-backed securities guaranteed by U.S. government agencies. Securities held to maturity ~~consists~~consist of Property Assessed Clean Energy investments. These investment contracts or bonds located in California and Florida, originate under a contractual obligation between the property owners, the local county administration, and a third-party administrator and sponsor. The assessments are created to fund the purchase and installation of energy saving improvements to the property such as solar panels. Generally, as a property assessment, the total assessment is repaid in installments over a period of 10 to 15 years by the then current property owner(s). Each installment is collected by the County Tax Collector where the property is located. The assessments are an obligation of the property. Securities, restricted consist of Federal Reserve Bank of Dallas (“FRB”) and Federal Home Loan Bank of Dallas (“FHLB”) stock, which are carried at cost.

As of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, securities available for sale with a fair value of ~~$805,000~~$364,000 and ~~$902,000,~~$554,000, respectively, were pledged against trust deposit balances held at the Bank.

AsAt each of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Bank held FRB stock in the amount of $1.2 ~~million and~~million. The Bank held FHLB stock in the amount of $1.2 million ~~all~~at each of ~~which was~~June 30, 2021 and December 31, 2020. The FRB stock and FHLB stock were classified as restricted securities.

As of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company held an income interest in a private investment, which is not readily marketable, accounted for under the cost method in the amount of $100,000.

The table below indicates the length of time individual investment securities have been in a continuous loss position as of June 30, ~~2020:~~2021:

The number of investment positions in this unrealized loss position totaled ~~one~~11 as of June 30, ~~2020.~~2021. The Company does not believe these unrealized losses are “other than temporary” as (i) it does not have the intent to sell the securities prior to recovery and/or maturity and, (ii) it is more likely than not that the Company will not have to sell the securities prior to recovery and/or maturity. Accordingly, as of June 30, ~~2020,~~2021, no impairment loss has been realized in the Company’s consolidated statements of income.

The amortized cost and estimated fair value of securities as of June 30, ~~2020~~2021 are presented below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential mortgage backed securities are shown separately since they are not due at a single maturity date.

~~On March 27,~~During the second quarter of 2020, the Company began participating in the Paycheck Protection Program (“PPP”) which was established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) ~~was signed by the President of the United States,~~ in response to the COVID-19 pandemic ~~which established the Paycheck Protection Program (“PPP”). The PPP is~~and administered by the ~~SBA with support from the Department of the Treasury.~~SBA. The PPP is a federally-guaranteed, low-interest rate loan program that is designed to provide a direct incentive for small businesses to keep workers on the payroll. Businesses may use PPP loan funds to pay up to twenty-four weeks of payroll costs as well as to cover other eligible business expenses. PPP loans may be partially or fully forgiven by the SBA if the funds are used for eligible expenses during the relevant forgiveness period and the borrower meets the employee retention criteria. PPP loans will carry an interest rate of 1.00% to be paid either by the SBA in the event of forgiveness or by the borrower for the term of the loan, which may be two or five years. PPP loans that the SBA approved on or after June 5, 2020 will have a maturity date of five years. Payments for PPP loans are deferred until the SBA issues a forgiveness decision or ten months after the end of the forgiveness period if the borrower fails to apply for forgiveness. Included in SBA 7(a) guaranteed loans at June 30, 2020, were $98.3 million of loans originated in the PPP. As mentioned above, the PPP loans may be forgiven by the SBA and are 100 percent guaranteed by the SBA. Therefore, no allowance for loan losses is allocated to PPP loans. Included in SBA 7(a) guaranteed loans at June 30, 2021, were $86.3 million of loans originated under the PPP.

As of June 30, ~~2020,~~2021, our loan portfolio included ~~$72.4~~$70.7 million of loans, approximately ~~18.3%~~17.2% of our total funded loans ~~and 24.4%~~(21.8% of total funded loans, net of ~~the SBA~~ PPP ~~loans of $98.3 million,~~loans) to the dental ~~industry.~~industry, as compared to $67.2 million of loans, or 16.8% of total funded loans (21.1% of total funded loans, net of PPP loans), at December 31, 2020. The Bank believes that these loans are to credit worthy borrowers and are diversified geographically.

The Company serves the small business community by offering loans promulgated under the SBA’s 7(a) and 504 loan programs, and loans guaranteed by the USDA. SBA 7(a) and USDA loans are typically guaranteed by each agency in amounts ranging from 75% to 80% of the principal balance. For SBA construction loans, the Company records the guaranteed funded portion of the loans as held for sale. When the SBA loans are fully funded, the Company may sell the guaranteed portion into the secondary market, on a servicing-retained basis, or reclassify from loans held for sale to loans held for investment if the Company determines that holding these loans provide better long-term risk adjusted returns than selling the loans. In calculating gain on the sale of loans, the Company performs an allocation based on the relative fair values of the sold portion and retained portion of the loan. The Company’s assumptions are validated by reference to external market information.

The Company had ~~$11.6~~$21.1 million and ~~$9.9~~$14.9 million of non-PPP SBA loans held for sale as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. During the three and six months ended June 30, ~~2020,~~2021, the Company sold ~~$6.2~~$1.1 million of non-PPP SBA loans, resulting in a gain on sale of loans of ~~$432,000. The Company did not sell any loans during~~$101,000. For the three and six months ended June 30, ~~2020. The~~2021, the Company elected to reclassify ~~$5.8~~$6.2 million and ~~$7.5~~$15.1 million, respectively, of the SBA 7(a) loans held for sale to loans held for ~~investment during the three and six months ended June 30, 2020, respectively.~~investment.

The Company maintains written loan origination policies, procedures, and processes which address credit quality at several levels including individual loan level, loan type, and loan portfolio levels.

Commercial and industrial loans, which are predominantly loans to dentists, are underwritten based on historical and projected income of the business and individual borrowers and guarantors. The Company utilizes a comprehensive global debt service coverage analysis to determine debt service coverage ratios. This analysis compares global cash flow of the borrowers and guarantors on an individual credit to existing and proposed debt after consideration of personal and business related other expenses. Collateral is generally a lien on all available assets of the business borrower including intangible assets. Credit worthiness of individual borrowers and guarantors is established through the use of credit reports and credit scores.

Consumer loans are evaluated on the basis of credit worthiness as established through the use of credit reports and credit scores. Additional credit quality indicators include borrower debt to income ratios based on verifiable income sources.

Real estate mortgage loans are evaluated based on collateral value as well as global debt service coverage ratios based on historical and projected income from all related sources including the collateral property, the borrower, and all guarantors where applicable.

The Company originates SBA loans which are sometimes sold into the secondary market. The Company continues to service these loans after sale and is required under the SBA programs to retain specified amounts. The ~~two~~2 primary SBA loan programs that the Company offers are the basic SBA 7(a) loan guaranty program and the SBA 504 loan program in conjunction with junior lien financing from a Certified Development Company (“CDC”). The SBA has designated the Bank as a “Preferred Lender.” As an SBA Preferred Lender, the Bank has been delegated loan approval, closing and most servicing and liquidation authority from the SBA.

The SBA 7(a) program serves as the SBA’s primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. Loan proceeds under this program can be used for most business purposes including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements and debt refinancing. Loan maturity is generally up to 10 years for non-real estate collateral and up to 25 years for real estate collateral. The SBA 7(a) loan is approved and funded by a qualified lender, partially guaranteed by the SBA and subject to applicable regulations. In general, the SBA guarantees up to 75% (100% for PPP loans) of the loan amount depending on loan size. The Company is required by the SBA to service the loan and retain a contractual minimum of 5% on all SBA 7(a) loans, but generally retains 25% (the unguaranteed portion). The servicing spread is 1% of the guaranteed portion of the loan that is sold in the secondary market. Included in the SBA 7(a) loans reflected in this Form 10-Q are the PPP loans originated by the Company ~~for the three months ended~~and outstanding as of June 30, ~~2020.~~2021.

The SBA 504 program is an economic development-financing program providing long-term, low down payment loans to businesses. Typically, a 504 project includes a loan secured from a private-sector lender with a senior lien, a loan secured from a CDC (funded by a 100% SBA-guaranteed debenture) with a junior lien covering up to 40% of the total cost, and a contribution of at least 10% equity from the borrower. Debenture limits are $5.0 million for regular 504 loans and $5.5 million for those 504 loans that meet a public policy goal.

~~The SBA has designated the Bank as a “Preferred Lender”. As a Preferred Lender, the Bank has been delegated loan approval, closing and most servicing and liquidation authority from the SBA.~~

The Company also offers Business & Industry (“B&I”) program loans through the USDA. These loans are similar to the SBA product, except they are guaranteed by the USDA. The guaranteed amount is generally 80%. B&I loans are made to businesses in designated rural areas and are generally larger loans to larger businesses than the SBA 7(a) loans. Similar to the SBA 7(a) product, they can be sold into the secondary market. These loans can be utilized for rural commercial real estate and equipment. The loans can have maturities up to 30 years and the rates can be fixed or variable.

Construction and land development loans are evaluated based on the borrower’s and guarantor’s credit worthiness, past experience in the industry, track record and experience with the type of project being considered, and other factors. Collateral value is determined generally by independent appraisal utilizing multiple approaches to determine value based on property type.

For all loan types, the Company establishes guidelines for its underwriting criteria including collateral coverage ratios, global debt service coverage ratios, and maximum amortization or loan maturity terms.

At the portfolio level, the Company monitors concentrations of loans based on several criteria including loan type, collateral type, industry, geography, and other factors. The Company also performs periodic market research and economic analysis at a local geographic and national level. Based on this research, the Company may from time to time change the minimum or benchmark underwriting criteria applied to the above loan types.

Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period of repayment performance by the borrower.

The restructuring of a loan is considered a “troubled debt restructuring” if due to the borrower’s financial difficulties, the Company has granted a concession that the Company would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modification of loan terms may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules, reductions in collateral and other actions intended to minimize potential losses.

The provisions of the CARES Act include an election to temporarily suspend accounting for troubled debt restructurings in certain circumstances, such as extensions or deferrals, related to the COVID-19 pandemic made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic declared under the National Emergencies Act terminates. The relief canpandemic. This temporary suspension may only be applied to modifications ~~for borrowers~~of loans that were not more than 30 days past due as of December 31, 2019. If elected, the temporary suspension may be applied to eligible modifications executed during the period beginning on March 1, 2020 and, as extended by the Consolidated Appropriations Act of 2021, ending on the earlier of January 1, 2022 or 60 days after the termination of the COVID-19 national emergency. In 2020, federal banking regulators, in consultation with the Financial Accounting Standards Board (“FASB”), issued interagency statements that included similar guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic that provide that short-term modifications and additional accommodations made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings. The Company elected to adopt these provisions of the CARES Act. AsAt June 30, 2021, there were 2 loans in COVID-19-related deferment with an aggregate outstanding balance of ~~June 30,~~approximately $3.2 million. At December 31, 2020, there were ~~modifications made to 139~~11 loans in COVID-19-related deferment with ~~a total~~an aggregate outstanding balance of $92.8 million, or 23.7% of the total loan portfolio. The modifications primarily included a delay of principal and/or interest payments for three months. These loans continue to accrue interest and are evaluated for past due status based on the revised payment terms. Under the applicable guidance, none of these loans were considered restructured as of June 30, 2020.approximately $4.3 million.

As of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, there were no loans identified as troubled debt restructurings. There were no new troubled debt restructurings during the ~~three and~~ six months ended June 30, ~~2020~~2021 and the year ended December 31, ~~2019.~~2020.

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

The Company’s impaired loans and related allowance is summarized in the following table:

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The Company’s past due loans are as follows:

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including internal credit risk based on past experiences as well as external statistics and factors. Loans are graded in one of six categories: (i) pass, (ii) pass-watch, (iii) special mention, (iv) substandard, (v) doubtful, or (vi) loss. Loans graded as loss are charged-off.

The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on credits quarterly. No significant changes were made to the loan risk grading system definitions and allowance for loan loss methodology during the past year. Ratings are adjusted to reflect the degree of risk and loss that is felt to be inherent in each credit. The Company’s methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

Credits rated pass are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Company. Loans in this category are loans to highly credit worthy borrowers with financial statements presenting a good primary source as well as an adequate secondary source of repayment.

Credits rated pass-watch loans have been determined to require enhanced monitoring for potential weaknesses which require further investigation. They have no significant delinquency in the past twelve months. This rating causes the loan to be actively monitored with greater frequency than pass loans and allows appropriate downgrade transition if verifiable adverse events are confirmed. This category may also include loans that have improved in credit quality from special mention but are not yet considered pass loans.

Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness; however, such concerns are not so pronounced that the Company generally expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits rated more harshly.

Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed. Guaranteed portions of SBA loans graded substandard are generally on non-accrual due to the limited amount of interest covered by the guarantee, usually 60 days maximum. However, there typically will be no exposure to loss on the principal amount of these guaranteed portions of the loan.

Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss.

Loans classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset even though partial recovery may be affected in the future.

The following table summarizes the Company’s internal ratings of its loans as of the dates indicated:

The activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, ~~2020~~2021 and ~~2019~~2020 is presented below. Management has evaluated the adequacy of the allowance for loan losses by estimating the losses in various categories of the loan portfolio.

The Company’s allowance for loan losses as of June 30, ~~2020~~2021 and December 31, ~~2019~~2020 by portfolio segment and detailed on the basis of the Company’s impairment methodology was as follows:

The Company’s recorded investment in loans as of June 30, ~~2020~~2021 and December 31, ~~2019~~2020 related to each balance in the allowance for loan losses by portfolio segment and detailed on the basis of the Company’s impairment methodology was as follows:

The Company leases certain office facilities and office equipment under operating leases. Certain of the leases contain provisions for renewal options, escalation clauses based on increases in certain costs incurred by the lessor, as well as free rent periods and tenant improvement allowances. The Company amortizes office lease incentives and rent escalations on a straight-line basis over the life of the respective leases. The Company has obligations under operating leases that expire between ~~2020~~2021 and 2024 with initial non-cancellable terms in excess of one year.

~~On January 1, 2019, we adopted a new accounting standard which required the recognition of~~We recognize our operating leases on our consolidated balance ~~sheet, under right-of-use assets and corresponding lease liabilities. See Note 1,~~ ~~Organization and Significant Accounting Policies,~~ ~~to these consolidated financial statements for more information. The right-of-use~~sheet. Right-of-use assets represent our right to utilize the underlying asset during the lease term, while ~~the~~ lease liability represents the obligation to make periodic lease payments over the life of the lease. As of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, right-of-use assets totaled ~~$898,000~~$694,000 and ~~$1.2 million,~~$963,000, respectively, and are reported as other assets on our accompanying consolidated balance ~~sheet.~~sheets. The related lease liabilities totaled ~~$1.0 million~~$752,000 and ~~$1.4~~$1.0 million, respectively, and are reported in other liabilities on our accompanying consolidated balance sheet. As of June 30, ~~2020,~~2021, the weighted average remaining lease term is ~~two years,~~nineteen months, and the weighted average discount rate is ~~4.63%~~4.62%.

As of June 30, ~~2020,~~2021, the minimum rental commitments under these noncancelable operating leases are as follows (in thousands):

The Company currently receives rental income from ~~seven~~nine tenants in its headquarters building for office space the Company does not occupy. Aggregate future minimum rentals to be received under non-cancelable leases as of June 30, ~~2020~~2021 were ~~$1.1 million~~$886,000 through 2027.

Core deposit intangible is amortized on a straight line basis over the initial estimated lives of the deposits, which range from five to ~~eight~~twelve years. The core deposit intangible amortization totaled $50,000 ~~for the three months ended June 30, 2020 and 2019,~~ and $101,000 for each of the three and six months ended June 30, 2021 and 2020, ~~and 2019.~~respectively.

The carrying basis and accumulated amortization of the core deposit intangible as of June 30, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows:

The estimated amortization expense of the core deposit intangible remaining as of June 30, ~~2020~~2021 is as follows:

Time deposits of $250,000 and over totaled ~~$63.1~~$77.1 million and ~~$37.4~~$59.6 million as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

As of June 30, ~~2020~~2021, the scheduled maturities of time deposits were as follows:

The aggregate amount of demand deposit overdrafts that have been reclassified as loans as of June 30, ~~2020~~2021 and December 31, ~~2019~~2020 was insignificant.

The Company has a blanket lien credit line with the FHLB with borrowing capacity of ~~$38.5~~$49.7 million secured by commercial loans. The Company determines its borrowing needs and utilizes overnight advance accordingly at varying terms. The Company had no0 borrowings with FHLB as of June 30, ~~2020. As of~~2021 and December 31, 2019, the Company had $12.0 million in borrowings with FHLB, which consisted of an overnight advance of $2.0 million with an interest rate of 1.45%, and a $10.0 million six-month fixed term advance with an interest rate of 2.18% and maturity date of January 27, 2020. ~~At maturity, the term advance was rolled into the overnight advance and subsequently paid off.~~

The Company also has a credit line with the FRB with borrowing capacity of ~~$30.3~~$25.0 million, which is secured by commercial loans. The Company had no0 borrowings under this line from the FRB at June 30, ~~2020~~2021 and December 31, ~~2019.~~2020. As part of the CARES Act, the FRB offered secured discounted borrowings to banks who originated PPP loans through the Paycheck Protection Program Liquidity Facility (“PPPLF”). At June 30, ~~2020,~~2021, the Bank pledged ~~$33.8~~$87.5 million of PPP loans to the FRB under the PPPLF to borrow ~~$33.8~~$87.5 million of funds at a rate of 0.35%, with maturities ranging from April 2022 through ~~June 2022.~~May 2026. PPP loans pledged as collateral for the PPPLF are excluded from the average assets used in the Company’s leverage ratio calculation.

As of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company also had subordinated notes totaling $12.0 million, consisting of $8.0 million issued in 2017 bearing an interest rate of 7.125% payable semi-annually and maturing on July 20, 2027, and $4.0 million issued in 2018 bearing an interest rate of 7.125% payable semi-annually and maturing on March 31, 2028. The subordinated notes are unsecured and subordinated in right of payment to the payment of our existing and future senior indebtedness and structurally subordinated to all existing and future indebtedness of our subsidiaries.

The Company funds certain costs for medical benefits in amounts determined at the discretion of management. The Company has a retirement savings 401(k) plan covering substantially all employees of the Bank, and a second plan covering substantially all employees of Sanders Morris, Tectonic Advisors and the Company.

Under the ~~401(k) plan covering the Bank’s employees,~~plans, the Company matches 100% of the employee’s contribution on the first 1% of the employee’s compensation, and 50% of the employee’s contribution on the next 5% of the employee’s compensation.

Under the safe harbor provision of the 401(k) plan adopted by Sanders Morris, Tectonic Advisors and the Company, the relevant employer is required to contribute 3% of eligible wages to the plan, up to the maximum amount under Internal Revenue Service (“IRS”) guidance, regardless of the level of the employee’s contributions. An eligible employee may contribute up to the annual maximum contribution allowed for a given year under ~~IRS guidance.~~guidance from the Internal Revenue Service. At its discretion, the Company may also make additional annual contributions to the ~~plan.~~plans. Any discretionary contributions are allocated to employees in the proportion of employee contributions to the total contributions of all participants in the ~~plan.~~plans. No discretionary contributions were made during the three and six months ended June 30, ~~2020~~2021 and ~~2019.~~2020.

The amount of employer contributions charged to expense under the two plans was $112,000 and $275,000 for the three and six months ended June 30, 2021, respectively, and $101,000 and $224,000 for the three and six months ended June 30, 2020, ~~respectively, and $87,000 and $174,000 for the three and six months ended June 30, 2019,~~ respectively, and is included in salaries and employee benefits on the consolidated statements of income. There was no accrual payable to the plans as of June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Income tax expense was $1.1 million and $2.3 million for the three and six months ended June 30, 2021, respectively, and $587,000 and $1.3 million for the three and six months ended June 30, 2020, ~~respectively~~respectively. The Company’s effective income tax rate was 22.4% and ~~$407,000 and $771,000~~22.5% for the three and six months ended June 30, ~~2019, respectively. The Company’s effective income tax rate was~~2021, respectively, compared to 21.7% and 22.3% ~~for the three and six months ended June 30, 2020, respectively, compared to 15.7% and 15.0%~~ for the same periods in the prior year, respectively. The effective income tax rate differed materially from the U.S. statutory rate of 21% for the three and months ended June 30, 2019 due to Tectonic Advisor’s and Sanders Morris tax status as a partnership for the periods prior to May 13, 2019, the date the Tectonic Merger was completed.

Net deferred tax ~~liabilities~~assets totaled ~~$351,000~~$290,000 and ~~$194,000~~$83,000 at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

The board of directors and shareholders adopted the Tectonic Financial, Inc. 2017 Equity Incentive Plan (“Plan”) in May 2017 in connection with the Company’s acquisition of TBI. The Plan was amended and restated by the Company and its shareholders effective March 27, 2019 in connection with the Company’s initial public offering. The Plan is administered by the Compensation Committee of the ~~Board~~Company’s board of directors and authorizes the granting of stock options, stock appreciation rights, restricted stock and restricted stock units to employees, directors and consultants in order to promote the success of the Company’s business. Incentive stock options may be granted only to employees of the Company, or a parent or subsidiary of the Company. The Company reserved 750,000 authorized shares of common stock for the Plan. The term of each stock option is no longer than 10 years from the date of the grant.

The Company accounts for stock-based employee compensation plans using the fair value-based method of accounting. The fair value of each stock option award is estimated on the date of grant by a third party using a closed form option valuation (Black-Scholes) model.

~~No stock options~~ The fair value of each grant award was estimated on the date of grant by a third party using the market approach based on the application of latest 12-month Company metrics to guideline public company multiples. There were no issues, forfeitures or ~~other equity awards were granted under~~exercises in the Plan during the three and six months ended June 30, ~~2020 or 2019.~~2021 and 2020.

The number of options outstanding and the weighted average exercise price, respectively, as of both June 30, 2021 and December 31, 2020 was 190,000 and $5.37. The weighted average contractual life as of June 30, 2021 and December 31, 2020 was 5.87 years and 6.37 years, respectively. Stock options outstanding at the end of the period had immaterial aggregate intrinsic values. The weighted-average grant date fair value of the options as of June 30, 2021 and December 31, 2020 was $1.94.

As of June 30, ~~2020, there were 50,000~~2021, all 190,000 stock options outstanding ~~that~~were vested, ~~on May 15, 2020, the third anniversary of the grant date, for which~~and compensation has been fully recognized. ~~In addition, there were 140,000 stock options outstanding as~~As of June 30, ~~2020 that vest on May 15,~~ 2021, ~~the fourth anniversary of the grant date.~~no options were exercised. The Company ~~is recording~~recorded compensation expense on a straight-line basis over the vesting periods. The Company recorded salaries and employee benefits expense on our consolidated statements of income in connection with the Plan of ~~$21,000~~$8,000 and ~~$45,000~~$24,000 for the three and six months ended June 30, ~~2020,~~2021, respectively, and $34,000 and $58,000 for the three and six months ended June 30, ~~2019, respectively.~~ 2020, respectively, related to the stock options.

The Company granted restricted stock awards totaling 210,000 shares of common stock on September 30, 2020. The vesting schedules vary by award, with all of the awards vesting over a three-year period from 2023 through 2025.

As of June 30, 2021, all 210,000 awarded shares were outstanding, and the grant date fair value was $4.81. The weighted average contractual life as of June 30, 2021 and December 31, 2020 ~~there~~ was ~~$58,000~~2.97 years and 3.46 years, respectively. The Company is recording compensation expense on a straight-line basis over the respective vesting periods. The Company recorded salaries and employee benefits expense on our consolidated statements of ~~total unrecognized compensation cost.~~

~~There were no grants, forfeitures, or exercises~~income in connection with the Plan of $70,000 and $139,000 for the three and six months ended June 30, ~~2020~~2021, respectively, related to the restricted stock awards. No salaries and ~~2019. The number of shares outstanding~~benefits expense was recognized related to the restricted stock awards during the three and ~~the weighted average exercise price as~~six months ended June 30, 2020. As of June 30, ~~2020 and December 31, 2019~~2021, there was ~~190,000 and $5.37. The weighted average contractual life as~~$799,000 of ~~June 30, 2020 and December 31, 2019 was 6.87 years and 7.37 years, respectively.~~unrecognized compensation cost related to the stock awards.

~~Stock options outstanding at the end of the period had immaterial aggregate intrinsic values.~~

The weighted-average grant date fair value of the options as of June 30, 2020 and December 31, 2019 was $1.94. Under Topic 805, the grant date fair value has been restated as though the Tectonic Merger had occurred upon the date at which the entities came under common control.

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the accompanying balance sheets. The ~~Company's~~Company’s exposure to credit loss in the event of non-performance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Company is involved in various regulatory inspections, inquiries, investigations and proceedings, and litigation matters that arise from time to time in the ordinary course of business. The process of resolving matters through litigation or other means is inherently uncertain, and it is possible that an unfavorable resolution of these matters, will adversely affect the Company, its results of operations, financial condition and cash flows. The Company’s regular practice is to expense legal fees as services are rendered in connection with legal matters, and to accrue for liabilities when payment is probable.

The Company, through its wholly owned subsidiary Sanders Morris, has uncommitted financing arrangements with clearing brokers that finance its customer accounts, certain broker-dealer balances, and firm trading positions. Although these customer accounts and broker-dealer balances are not reflected on the consolidated balance sheets for financial reporting purposes, Sanders Morris has generally agreed to indemnify these clearing brokers for losses they may sustain in connection with the accounts, and therefore, retains risk on these accounts. Sanders Morris is required to maintain certain cash or securities on deposit with its clearing brokers. Deposits with clearing organizations were $250,000 as of June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

~~In connection with the Tectonic Merger and the Company’s initial public offering (see Note 2,~~ ~~Tectonic Merger and Initial Public Offering of Series B Preferred Stock,~~ ~~to these consolidated financial statements for more information), the~~The Company ~~entered into~~is party to amended and restated employment agreements with Patrick Howard, President and Chief Operating Officer of the Company, and Ken Bramlage, Executive Vice President and Chief Financial Officer of the Company. In addition, the Company entered into an employment agreement with A. Haag Sherman, Chief Executive Officer of the Company, in connection with the Company’s merger with Tectonic Holdings and its initial public offering. Messrs. Sherman and Howard’s employment agreements have a four year term and Mr. Bramlage’s employment agreement has a three year term. Each employment agreement is automatically renewable for an additional one-year term unless either party elects not to renew.

~~Management agreements with Services:~~Advisors Through May 2019, the Company had management services agreements (the “Tectonic Management Services Agreement”) with Tectonic Services, LLC (“Tectonic Services”). Tectonic Services was the Managing Member of Tectonic Holdings, Tectonic Advisors, Sanders Morris and HWG prior to the Tectonic Merger. Under the Tectonic Management Services Agreement, Tectonic Services was paid on a monthly basis for management services to assist in conducting business operations and accomplishing strategic objectives. The Tectonic Management Services Agreement was terminated upon the closing of the Tectonic Merger. The Company did not incur any expense under the Tectonic Management Services Agreement for the three and six months ended June 30, 2020. The Company incurred expense of $35,000 and $118,000 under the Tectonic Management Services Agreement during the three and six months ended June 30, 2019. There was no payable to Tectonic Services under these agreements as of June 30, 2020 or December 31, 2019.

’~~Advisors’~~ service agreements: In January 2006, the Company entered into a services agreement (the “Tectonic Advisors-CWA Services Agreement”) with Cain Watters. The owners of Cain Watters together hold approximately 31% of the voting ownership in the Company. Under the Tectonic Advisors-CWA Services Agreement, Cain Watters pays the Company for due diligence and research services on investment alternatives available to Cain Watters’ clients. The Company earned $180,000 and $484,000 during the three and six months ended June 30, 2021, respectively, and $489,000 and $912,000 during the three and six months ended June 30, 2020, ~~respectively, and $387,000 and $706,000 during the three and six months ended June 30, 2019,~~ respectively, under the Tectonic Advisors-CWA Services Agreement. These fees are included in investment advisory and other related services in the accompanying consolidated statements of income. The Company had ~~$355,000~~0 amounts receivable at June 30, 2021, and ~~$193,000~~$43,000 in fees receivable related to these services at ~~June 30, 2020 and~~ December 31, ~~2019, respectively,~~2020, which ~~are~~is included in other assets on the consolidated balance sheets.

CWA Fee Allocation Agreement: In January 2006, Tectonic Advisors entered into an agreement (the “Fee Allocation Agreement”) with Cain Watters with reference to its advisory agreement with the Bank. Tectonic Advisors had ~~$175,000~~$217,000 and ~~$186,000~~$198,000 payable to Cain Watters related to this agreement at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, which are included in other liabilities on the accompanying consolidated balance sheets.

~~DCFH~~ ~~Series A Preferred Stock:~~ The Company had 80,338 shares of Series A preferred stock outstanding to DCFH as of December 31, 2018, representing all of the Series A preferred stock outstanding of the Company. DCFH has as its general partner an entity owned by a director of the Company. The Series A preferred stock was issued in exchange for the Tectonic Holdings preferred units in the Tectonic Merger. The Tectonic Holdings preferred units were issued in an exchange that occurred prior to the Tectonic Merger, under which an unsecured note payable to DCFH was exchanged for the Tectonic Holdings preferred units. See Note 2, ~~Tectonic Merger and Initial Public Offerings of Series B Preferred Stock,~~ ~~to these consolidated financial statements for more information. The Series A preferred stock held by DCFH ranks senior to our common stock and~~ ~~pari passu~~ to the Series B preferred stock issued in our initial public offering as to dividend rights and rights upon liquidation, dissolution and/or winding up. Dividends will be paid on the Series A preferred stock only when, as and if declared by our board of directors at a rate of 10% per annum (payable quarterly). The Series A preferred stock has a liquidation preference of $100 per share. In addition, the Series A preferred stock is not convertible into any other security of the Company. The Series A preferred stock is redeemable at the option of the Company at any time after the fifth anniversary of the original issue date at a redemption price equal to the liquidation preference, plus any declared but unpaid dividends, subject to the requisite approval of the Federal Reserve, if any.

~~On July 12, 2019, the Company repurchased and retired the Series A preferred stock from DCFH. There was no Series A preferred stock outstanding as of December 31, 2019 or June 30, 2020.~~

~~Recruitment incentive compensation expense:~~ Amounts were provided to or paid on behalf of financial advisors upon employment primarily as a recruitment incentive. These amounts were recorded as notes receivable, related parties, and were forgiven on a fixed repayment schedule, with the forgiven amounts resulting in the recognition of compensation expense to the payee. The amortization period for the notes receivable, related parties did not exceed three years. Upon termination of employment of a payee financial advisor, any principal and interest outstanding would have been immediately due and payable.

The notes receivable, related parties, were fully repaid as of December 31, 2019. Therefore, there was no amount receivable under the notes receivable, related parties as of June 30, 2020 or December 31, 2019. There was no expense recognized for the three or six months ended June 30, 2020, and the Company recognized $15,000 and $30,000 in compensation expense for the three and six months ended June 30, 2019, respectively, in relation to the forgiven notes receivable, including related interest income.

As of June 30, ~~2020,~~2021, certain officers, directors and their affiliated companies had depository accounts with the Bank totaling approximately ~~$6.3~~$5.1 million. None of those deposit accounts have terms more favorable than those available to any other depositor.

As of June 30, ~~2020,~~2021, the Bank had PPP loans to certain of its directors and their affiliated companies totaling ~~$2.9~~$2.8 million in the aggregate. These loans were made to the Bank’s directors and their affiliated companies on the same terms as all other loans originated by the Bank under the ~~PPP, established by the CARES Act.~~PPP. In addition, these loans were approved by the board of directors of the Bank in accordance with the Bank’s regulatory and policy requirements.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s and, accordingly, the Company’s business, results of operations and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under GAAP, regulatory reporting requirements, and regulatory capital standards. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.

Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and tier 1 capital to risk-weighted assets, common equity Tier 1 (“CET1”) capital to total risk-weighted assets, and of tier 1 capital to average assets. To be categorized as “well-capitalized” under the prompt corrective action framework, the Bank must maintain (i) a Total risk-based capital ratio of 10%; (ii) a Tier 1 risk-based capital ratio of 8%; (iii) a Tier 1 leverage ratio of 5%; and (iv) a CET1 risk-based capital ratio of 6.5%.

In addition, the Basel III regulatory capital reforms (“Basel III”) implemented a capital conservation buffer of 2.5% ~~to be phased in 0.625% each year over a four-year period, becoming~~that was fully implemented as of January 1, 2019. The Basel III minimum capital ratio requirements as applicable to the Company and the Bank ~~on January 1, 2019 after the full phase-in period~~as of June 30, 2021 are summarized in the table below.

Accordingly, a financial institution may be considered “well capitalized” under the prompt corrective action framework, but not satisfy the ~~fully phased-in~~buffered Basel III capital ratios. As of June 30, ~~2020,~~2021, the Bank’s regulatory capital ratios are in excess of the capital conservation buffer and the levels established for “well capitalized” institutions under the Basel III Rules.

Dividend Restrictions. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared (including those on the Series A preferred stock) would cause the regulatory capital of the Bank and/or the Company to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. As of June 30, ~~2020,~~2021, approximately ~~$12.7~~$19.3 million was available for the declaration of dividends by the Bank to the Company without prior approval of regulatory agencies and still maintain its “well capitalized” status. In addition, as a Texas corporation, we are restricted under the Texas Business Organizations Code from paying dividends under certain conditions. Under Texas law, we cannot pay dividends to shareholders if the dividends exceed our surplus or if after giving effect to the dividends, we would be insolvent.

In addition to the regulatory requirements of the federal banking agencies, Sanders Morris and Tectonic Advisors are subject to the regulatory framework applicable to registered investment advisors under the SEC’s Division of Investment Management, and additionally, Sanders Morris is regulated by FINRA, which, among other requirements, imposes minimums on its net regulatory capital.

The Company’s reportable segments consist of ~~Banking, Other~~“Banking,” “Other Financial Services,” and ~~HoldCo~~“HoldCo” operations.

The ~~Banking~~“Banking” segment consists of operations relative to the Company’s full service banking operations, including providing depository and lending services to individual and business customers, and other related banking services.

The ~~Other~~“Other Financial ~~Services~~Services” segment includes managed and directed brokerage, investment advisory services, including related trust company operations, third party administration, and insurance brokerage services to both individuals and businesses.

The ~~HoldCo~~“HoldCo) operations include the operations and subordinated debt held at the Bank’s immediate parent, as well as the activities of the financial holding company which serves as TBI’s parent.

The tables below present the financial information for each segment that is specifically identifiable, or based on allocations using internal methods, for the three and six months ended June 30, ~~2020~~2021 and ~~2019:~~2020:

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. FASB ~~ASC~~Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company has no securities in the Level 1 or Level 3 inputs.

The following table summarizes securities available for sale measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Market valuations of our investment securities which are classified as level 2 are provided by an independent third party. The fair values are determined by using several sources for valuing fixed income securities. Their techniques include pricing models that vary based on the type of asset being valued and incorporate available trade, bid and other market information. In accordance with the fair value hierarchy, the market valuation sources include observable market inputs and are therefore considered Level 2 inputs for purposes of determining the fair values.

The Company considers transfers between the levels of the hierarchy to be recognized at the end of related reporting periods. During the three and six months ended June 30, ~~2020,~~2021, no assets for which fair value is measured on a recurring basis transferred between any levels of the hierarchy.

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Financial assets measured at fair value on a non-recurring basis during the reported periods include impaired loans and loans held for sale.

Impaired loans. As of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, there were no impaired loans that were reduced by specific valuation allowances.

The significant unobservable inputs (Level 3) used in the fair value measurement of collateral for collateral-dependent impaired loans primarily relate to the specialized discounting criteria applied to the borrower’s reported amount of collateral. The amount of the collateral discount depends upon the condition and marketability of the collateral, as well as other factors which may affect the collectability of the loan. As the Company’s primary objective in the event of default would be to liquidate the collateral to settle the outstanding balance of the loan, collateral that is less marketable would receive a larger discount. During the reported periods, there were no discounts for collateral-dependent impaired loans.

The valuation of our not readily marketable investment securities which are classified as Level 3 are based on the Company’s own assumptions and inputs that are both significant to the fair value measurement, and are unobservable.

Our assessment of the significance of a particular input to the Level 3 fair value measurements in their entirety requires judgment and considers factors specific to the assets. It is reasonably possible that a change in the estimated fair value for instruments measured using Level 3 inputs could occur in the future.

Loans held for sale. Loans held for sale include the guaranteed portion of SBA and USDA loans and are reported at the lower of cost or estimated fair value. Fair value for SBA and USDA loans is based on market indications available in the market. There were no impairments reported for the periods presented.

Non-financial assets measured at fair value on a non-recurring basis during the reported periods include other real estate owned which, upon initial recognition, was re-measured and reported at fair value through a charge-off to the allowance for loan losses. Additionally, foreclosed assets which, subsequent to their initial recognition, are re-measured at fair value through a write-down included in other non-interest expense. Regulatory guidelines require the Company to reevaluate the fair value of foreclosed assets on at least an annual basis. The fair value of foreclosed assets, upon initial recognition and impairment, are re-measured using Level 2 inputs based on observable market data. Estimated fair value of other real estate is based on appraisals. Appraisers are selected from the list of approved appraisers maintained by management. As of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, there were no foreclosed assets. There were no foreclosed assets re-measured during the three and six months ended June 30, ~~2020~~2021 and ~~2019.~~2020.

The methods and assumptions used to estimate fair value of financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, restricted securities, accrued interest receivable and accrued interest payable. The estimated fair value of demand and savings deposits is the carrying amount since rates are regularly adjusted to market rates and amounts are payable on demand. For borrowed funds and variable rate loans or deposits that re-price frequently and fully, the estimated fair value is the carrying amount. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent re-pricing, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. For loans held for sale, the estimated fair value is based on market indications for similar assets in the active market. The estimated fair value of other financial instruments and off-balance-sheet loan commitments approximate cost and are not considered significant to this presentation.

The Company adds a servicing asset when loans are sold and the servicing is retained, and uses the amortization method for the treatment of the servicing asset. The servicing asset is carried at lower of cost or fair value. Loan servicing assets do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using a discounted cash flow model having significant inputs of discount rate, prepayment speed and default rate. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the hierarchy. During the six months ended June 30, 2021, the Company added servicing assets totaling $19,000 in connection with the sale of $1.1 million in loans. During the six months ended June 30, 2020, the Company added servicing assets totaling $92,000 in connection with the sale of $6.2 million in ~~loans during the three months ended March 31, 2020. There were no sales of loans for the three months ended June 30, 2020 and for the three and six months ended June 30, 2019.~~loans. For the three and six months ended June ~~30,~~20, 2020, there was a credit provision of $100,000 to the valuation allowance for servicing assets. There was no0 allowance provision ~~for the three months ended June 30, 2019. The allowance provision for servicing assets~~ for the three and six months ended June 30, ~~2019 was $162,000.~~2021.

FASB ASC Topic 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The estimated fair value approximates carrying value for cash and cash equivalents and accrued interest. The methodologies for other financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis are discussed below.

Securities held to maturity. The securities in this category are Property Assessed Clean Energy investments. These investment contracts or bonds originate under a contractual obligation between the property owners, the local county administration, and a third-party administrator and sponsor. These investments have no readily determinable fair value.

Loans. The estimated fair value approximates carrying value for variable-rate loans that reprice frequently and with no significant change in credit risk. The fair value of fixed-rate loans and variable-rate loans which reprice on an infrequent basis is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality.

Deposits. The fair values of demand deposits, savings deposits are, by definition, equal to the amount payable on demand and, therefore, approximate their carrying amounts. The fair values for time deposits are estimated using a discounted cash flow calculation that utilizes interest rates currently being offered on time deposits with similar contractual maturities.

Borrowed ~~Funds~~.Funds. The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed-rate borrowings is estimated using quoted market prices, if available, or by discounting future cash flows using current interest rates for similar financial instruments. The estimated fair value approximates carrying value for variable-rate junior subordinated deferrable interest debentures that reprice quarterly.

Loan Commitments, Standby and Commercial Letters of ~~Credit~~.Credit. Our lending commitments have variable interest rates and “escape” clauses if the customer’s credit quality deteriorates. Therefore, the fair values of these items are not significant and are not included in the following table.

Carrying amounts and estimated fair values of other financial instruments by level of valuation input were as follows:

~~ASU 2016-02~~Accounting Standards Update (, “~~Leases (Topic 842).”~~ ASU 2016-02 among other things, requires lessees to recognize a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. ASU 2016-2 was effective on January 1, 2019. The Company adopted ASU 2016-02 as of January 1, 2019, and amounts recorded as right-of-use lease assets and lease liabilities were $1.6 million and $1.7 million, respectively, as of January 1, 2019.

ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 became effective for most public companies on January 1, 2020, subject to a company’s election to defer implementation due to the COVID-19 pandemic. On July 17, 2019, the FASB proposed to delay the implementation of the current expected credit loss standard (“CECL”) methodology for certain companies including smaller reporting companies (“SRCs”). The Company is a SRC as defined by the SEC. The ~~Company is designated as a SRC with~~proposed delay of the ~~SEC. The proposed delay~~implementation of the CECL methodology by FASB was subject to a comment period. At the October 16, 2019 FASB meeting, the FASB voted unanimously to delay the effective date of CECL adoption for SRCs to January 1, 2023. The Company has developed processes for assessment and documentation, model development and validation. While the Company generally expects that the implementation of ASU 2016-13 and the CECL methodology may increase their allowance for loan losses balance, the adoption will be significantly influenced by the composition, characteristics and quality of the loan portfolio along with the prevailing economic conditions and forecasts as of the adoption date.

ASU ~~2017-04, “Intangibles-Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.”~~ ASU 2017-04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 became effective for the Company on January 1, 2020, and did not have a significant impact on the Company’s consolidated financial statements.

~~ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.”~~ ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this update remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 became effective for the Company on January 1, 2020, and did not have a significant impact on the Company’s consolidated financial statements.

~~ASU~~ 2019-12, ~~“Income~~“Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.” The guidance issued in this update simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 will be effective for the Company on January 1, 2021, with early adoption permitted, and is not expected to have a significant impact on the Company’s consolidated financial statements.

ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs.” ASU 2020-08 clarifies the accounting for the amortization of purchase premiums for callable debt securities with multiple call dates. ASU 2020-8 became effective for the Company on January 1, 2021 and did not have a significant impact on the Company’s consolidated financial statements.

~~In January 2019,~~On July 1, 2021, we through our wholly-owned subsidiary TBI, acquired Integra Funding Solutions, LLC, a Texas limited liability company (“Integra”), through the ~~Company acquired~~merger of Integra with and into TBI, with TBI surviving the ~~assets of Nolan,~~merger. Integra is a ~~TPA based in Kansas City, Kansas, with~~factoring company that provides financing to smaller transportation companies across the United States principally by purchasing their accounts receivable at a ~~cash payment of $2.5 million~~discount and offers the TPA services as a division of the Bank. Founded in 1979, Nolan provides clients with retirement plan design and administrative services, specializing in ministerial recordkeeping, administration, actuarial and design services for retirement plans for small businesses and professional practices. Nolan has clients in 50 states and Nolan shares many clients with our trust department.then collecting such receivables at face value. We believe that the addition of ~~TPA services allows us to serve our clients more fully and to attract new clients to our trust platform.~~

The assets acquired consisted of furniture, fixtures and equipment with a fair value of $150,000. There were no liabilities acquired, resulting in goodwill of $2.4 million from the acquisition. The goodwillthis small business lending vertical will ~~not be amortized, but will be tested for impairment annually. The goodwill recorded is deductible for federal income tax purposes. In addition,~~provide the Bank ~~entered into a consulting agreement~~ with ~~an entity controlled by Mr. Nolan~~additional breadth in its lending platform and ~~his family, pursuant~~enable the Bank to ~~which Mr. Nolan agreed~~continue to ~~serve as CEO of the division for three years after closing~~prudently grow its balance sheet and ~~provide mutually agreeable consulting services thereafter, in consideration for a monthly fee of $26,041 plus incentive payments based~~generate relatively attractive returns on ~~certain performance metrics, for eight years after closing.~~its assets.

Pursuant to the terms of and subject to the conditions set forth in the Agreement and Plan of Merger (the “Merger Agreement”), the transaction provided for the payment to the members of Integra of (a) an amount of cash equal to (i) $2,458,777, subject to certain adjustments described in the Merger Agreement which totaled $739,521, and (b) 453,203 shares of the Company’s common stock.

A summary of the preliminary estimated fair values of assets acquired, liabilities assumed, consideration transferred, and the resulting goodwill is as follows:

Item2. ~~Management’s~~Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto appearing in Item1 of PartI of this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2021 (this “Form 10-Q”), as well as with our consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 filed with the Securities and Exchange Commission (the ~~“2019~~“SEC”) on March 31, 2021 and amended on Form ~~10-K”~~10-K/A on May 5, 2021 (as amended, the “2020 Form 10-K”).

Statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including our expectations, intentions, beliefs, or strategies regarding the future. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions. ~~It is important~~Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to ~~note~~risks, assumptions, estimates and uncertainties that ~~our~~are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may differ materially from those in or implied by such forward-looking statements due to the factors discussed under the section entitled “Risk Factors,” in our ~~2019~~2020 Form 10-K, and under the section entitled “Risk Factors” in this Form 10-Q, including, but not limited to, the following:

You should not place undue reliance on any such forward-looking statements. Any forward-looking statement reflects only information known to us as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by law. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement.

We file or furnish with the SEC annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports required by Section 13(a) or 15(d) of the Exchange Act. Electronic copies of our SEC filings are available to the public at the SEC’s website at https://www.sec.gov. In addition, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other reports required by Section 13(a) or 15(d) of the Exchange Act are available through our website, www.t.financial, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

The Company routinely posts important information for investors on its website, www.t.financial. The Company intends to use its website as a means of disclosing material non-public information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Company’s website, in addition to following the Company’s press releases, SEC filings, public conference calls, presentations and webcasts.

Our website and the information contained on or accessible through our website is not incorporated by reference into, and is not a part of, this Form 10-Q.

The Company continues to actively monitor developments related to the COVID-19 pandemic including the progress of COVID-19 vaccines, the emergence of the so-called Delta variant, the effects of the CARES Act and ~~its~~the American Rescue Plan Act of 2021 and the prospects for additional fiscal stimulus programs; however, the extent to which each will impact our operations and financial results in 2021 remains uncertain.

The Consolidated Appropriations Act, 2021, which was signed into law on December 27, 2020, allocated an additional $284 billion to the ~~Company’s business, customers, employees, vendors,~~SBA to fund a second round of PPP and ~~service providers. Through~~extended the application period for the PPP to March 31, 2021. The application period was later extended to the earlier of May 31, 2021, or such date when all PPP funds are exhausted. The Company actively participated in the second ~~quarter~~round of ~~2020,~~ the ~~most notable financial impact~~PPP and began submitting applications to the ~~Company’s results~~SBA for borrowers on January 15, 2021 when the application window opened. The PPP was adjusted for the second round to allow applications from both first time borrowers and those that obtained loans during the first round of ~~operations~~the PPP. The revised PPP, among other things, required that borrowers demonstrate or certify that they experienced a 25% or greater reduction in gross receipts from a quarter in 2020 compared to the same quarter in 2019 and certify that current economic uncertainty makes the loan request necessary to support their ongoing operations. The Bank funded 694 PPP loans, for $66.2 million related to the second round of PPP during the six months ended June 30, 2021, and as of June 30, 2021, the Bank had $86.3 million of total outstanding PPP loans in its loan portfolio. Management believes that the majority of these PPP loans will ultimately be forgiven by the SBA or repaid in accordance with the terms of the PPP over the coming quarters.

While all industries could experience adverse effects related to the COVID-19 pandemic, the loan portfolio includes customers in industries such as dental, travel, hotel, leisure, retail, convenience store, restaurant and entertainment, which industries have all been adversely impacted by the COVID-19 pandemic. While the Company has not experienced any material losses related to such industries in the portfolio, management recognizes that these industries may take longer to recover and continues to monitor these customers closely. The commercial credit area continues to communicate regularly with the borrowers and monitors their activity closely. This information is used to analyze the ~~building~~performance of these loans and to anticipate any potential issues that these loans may develop so that risk ratings may be appropriately adjusted in a timely manner. During the course of the COVID-19 pandemic, the Company increased its allowance for loan losses ~~primarily~~from $2.2 million as of March 31, 2020 to $3.3 million as of June 30, 2021, due in part to the changes in the economic environment related to the disruption in business activity as a result of continued deterioration in macroeconomic variables such as unemployment, which are incorporated into our economic forecasts utilized to calculate our allowance for loan losses. See the section captioned “Allowance for Loan Losses” included elsewhere in this discussion for further analysis of the provision for loan losses.

In addition to the effect on our allowance for loan losses, the COVID-19 pandemic has resulted in a significant and continuing decrease in commercial activity throughout the State of Texas as well as nationally, which has or may have the following impacts on the Company:

~~The Company continues to monitor and review the evolving risks and developments~~ of the COVID-19 pandemic. The ~~duration and scope~~Company recorded a provision of approximately $141,000 during the ~~disruptions due~~three months ended June 30, 2021. At June 30, 2021, there were 2 loans in COVID-19-related deferment with an aggregate outstanding balance of approximately $3.2 million.

For more information on the COVID-19 pandemic, see “Recent Developments Related to the ~~pandemic~~COVID-19 Pandemic” in Item 7., “Management’s Discussion and ~~their impact on the Company, its internal operations, including personnel on which we rely,~~Analysis of Financial Condition and Results of Operations,” and Item 1A., “Risk Factors,” in our ~~customers and the areas in which they operate, and the wider economy remain uncertain.~~2020 Form 10-K.

The impact of the COVID-19 pandemic on the Company for the periods covered by this Form 10-Q ~~are~~is detailed in each applicable section of ~~“Management's~~“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included below.

We are a financial holding company headquartered in Dallas, Texas. We provide a wide array of financial products and services including banking, trust, investment advisory, securities brokerage, third party administration, recordkeeping and insurance to individuals, small businesses and institutions in all 50 states.

The following discussion and analysis presents our consolidated financial condition as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, and our consolidated results of operations for the three and six months ended June 30, ~~2020~~2021 and ~~2019.~~2020. The discussion should be read in conjunction with our financial statements and the notes related thereto in this Form 10-Q and in the audited financial statements in our 2020 Form ~~10-K filed with the SEC on March 31, 2020.~~10-K.

On May 13, 2019, we completed a merger with Tectonic Holdings, through which we expanded our financial services to include investment advisory, securities brokerage and insurance services. Pursuant to the Tectonic Merger Agreement, dated March 28, 2019, by and between the Company and Tectonic Holdings, Tectonic Holdings merged with and into the Company, with the Company as the surviving institution. Immediately after the completion of the Tectonic Merger, the Company completed a 1-for-2 reverse stock split with respect to the outstanding shares of its common stock. The computations of all share and per share amounts in this Form 10-Q have been adjusted retroactively to reflect the reverse stock split.

~~Following the Tectonic Merger, we~~We operate through four main direct and indirect subsidiaries: (i) ~~TBI,~~T Bancshares, Inc. (“TBI”), which was incorporated under the laws of the State of Texas on December 23, 2002 to serve as the bank holding company for T Bank, N.A. a national banking association (“the ~~Bank,~~Bank”), (ii) Sanders Morris Harris LLC (“Sanders Morris”), a registered broker-dealer with ~~FINRA,~~the Financial Industry Regulatory Authority (“FINRA”), and registered investment advisor with the SEC, (iii) Tectonic Advisors, LLC (“Tectonic Advisors”), a registered investment advisor registered with the SEC focused generally on managing money for relatively large, affiliated institutions, and (iv) HWG Insurance Agency LLC (“HWG”), an insurance agency registered with the ~~TDI.~~Texas Department of Insurance (“TDI”).

In January 2019, the Bank acquired Nolan, a TPA based in Overland Park, Kansas. Founded in 1979, Nolan provides clients with retirement plan design and administrative services, specializing in ministerial recordkeeping, administration, actuarial and design services for retirement plans of small businesses and professional practices. The addition of TPA services allows us to serve our clients more fully and to attract new clients to our trust platform. Please see Note 18, ~~Nolan Acquisition~~, ~~to the consolidated financial statements included in this Form 10-Q for more information.~~

The Company completed the underwritten initial public offering of its Series B preferred stock on May 14, 2019. In connection with the initial public offering, the Company issued and sold 1,725,000 shares of its Series B preferred stock, including 225,000 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares, at an offering price of $10.00 per share, for aggregate gross proceeds of $17.25 million before deducting underwriting discounts and offering expenses, and aggregate net proceeds of $15.5 million after deducting underwriting discounts and offering expenses.

Prior to the Tectonic Merger, Sanders Morris and Tectonic Advisors were wholly owned subsidiaries of Tectonic Holdings, which was under common control with the Company. The Tectonic Merger has been accounted for as a combination of businesses under common control in accordance with Topic 805. Under Topic 805, all the assets and liabilities of Tectonic Holdings are carried over to the books of the Company at their then current carrying amounts, and the consolidated financial statements have been retrospectively adjusted to reflect the acquisition of Sanders Morris, HWG and Tectonic Advisors for all periods subsequent to the earliest date at which the entities were under common control, May 15, 2017. All intercompany transactions and balances are eliminated in consolidation.

We prepare consolidated financial statements based on ~~GAAP~~accounting principles generally accepted in the United States (“GAAP”) and to customary practices within the financial services industry. These policies, in certain areas, require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain at the time we make the accounting estimate and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the financial statements.

Accounting policies related to the allowance for loan losses are considered to be critical as these policies involve considerable subjective judgment and estimation by management. Management has adopted a methodology to properly analyze and determine an adequate loan loss allowance, which includes allowance allocations calculated in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310, Receivables, and allowance allocations calculated in accordance with FASB ASC Topic 450, Contingencies. The analysis is based on sound, reliable and well documented information and is designed to support an allowance that is adequate to absorb all estimated incurred losses in our loan portfolio. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. Refer to the 2020 Form 10-K for additional information regarding critical accounting policies.

Net income available to common shareholders ~~decreased $262,000,~~increased $1.6 million, or ~~13.2%~~94.1%, to $3.3 million for the three months ended June 30, 2021, compared to $1.7 million for the three months ended June 30, ~~2020, compared to $2.0 million~~2020. Earnings per diluted common share were $0.50 and $0.26 for the three months ended June 30, ~~2019. Earnings per diluted common share was $0.26~~2021 and ~~$0.30, for the three months ended June 30,~~ 2020, ~~and 2019,~~ respectively. Net income available to common shareholders ~~decreased $242,000,~~increased $3.5 million, or ~~6.1%~~94.6%, to $7.2 million for the six months ended June 30, 2021, compared to $3.7 million for the six months ended June 30, ~~2020, compared to $4.0 million~~2020. Earnings per diluted common share was $1.09 and $0.57 for the six months ended June 30, ~~2019. Earnings per diluted common share~~2021 and 2020, respectively. The increase in earnings was ~~$0.57~~primarily due to increased revenue in the Banking and ~~$0.61, for the six months ended June 30, 2020 and 2019, respectively.~~Other Financial Services segments.

Our accounting and reporting policies conform to ~~generally accepted accounting principles in the United States (“GAAP”)~~GAAP and the prevailing practices in the banking industry. However, this Form 10-Q contains financial information determined by methods other than in accordance with GAAP, which includes return on average tangible common equity. We calculate return on average tangible common equity as net income available to common shareholders (net income less dividends paid on preferred stock) divided by average tangible common equity. We calculate average tangible common equity as average shareholders’ equity less average goodwill, average core deposit intangible and average preferred stock. The most directly comparable GAAP financial measure for tangible common equity is average total shareholders’ equity. We believe these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding our performance. We believe investors benefit from referring to these non-GAAP measures and ratios in assessing our operating results and related trends, and when planning and forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, measures and ratios prepared in accordance with GAAP.

For the three months ended June 30, ~~2020,~~2021, annual return on average assets was ~~1.68%~~2.71%, compared to ~~2.71%~~1.68% for the same period in the prior year, and annual return on average tangible common equity was ~~29.23%~~38.24%, compared to ~~39.32%~~29.23% for the same period in the prior year. For the six months ended June 30, ~~2020,~~2021, annual return on average assets was ~~2.07%~~3.04%, compared to ~~2.77%~~2.07% for the ~~six months ended June 30, 2019,~~same period in the prior year, and annual return on average tangible common equity was ~~33.42%~~44.25%, compared to ~~43.78%~~33.42% for the same period in the prior year. The ~~lower~~higher annual return ratios for the three and six months ended June 30, ~~2020 were primarily~~2021 was due to an increase in income which outpaced the increases in ~~both~~ average assets and average tangible common equity ~~during the three and six months ended June 30, 2020,~~ compared to the ~~three and six months ended June 30, 2019.~~same period in the prior year. The growth in average tangible common equity between the two periods is primarily related to earnings, net of preferred dividends paid, from June 30, ~~2019~~2020 to June 30, ~~2020.~~2021. The growth in average assets is primarily attributable to growth in ~~average interest-bearing deposits during the six months ended June 30, 2020 to increase liquidity in anticipation of funding the PPP loans discussed under “COVID-19 Update” above.~~loans.

The following table presents non-GAAP reconciliations of annual return on average tangible common equity:

Total assets grew by ~~$164.8~~$44.0 million, or ~~45.1%~~8.6%, to ~~$529.9~~$557.4 million as of June 30, ~~2020~~2021 from ~~$365.1~~$513.4 million as of December 31, ~~2019.~~2020. This increase was primarily due to an increase ~~in our~~of $36.0 million for interest-bearing deposits, $9.9 million for loans, net of allowance for loan losses, and $6.3 million for loans held for sale. The increases were offset by decreases of ~~$102.6~~$2.8 million ~~or 35.4%,~~for cash and due from banks, $3.0 million for securities held to ~~$392.2~~maturity and $2.7 million as of June 30, 2020, from $289.7 million as of December 31, 2019, due primarily to loans originated under the SBA’s PPP program, and an increase in interest-bearing deposits at the Bank from purchases of certificates of deposit in the wholesale market.for other assets. Substantially all loans outside of those made under the ~~SBA’s~~ PPP ~~program~~ are secured by specific collateral, including business assets, consumer assets, and commercial real estate. We anticipate that as the majority of PPP loans are forgiven or paid off, which we believe will occur principally over the next 12six months, and as customers spend down their PPP funds, this will result in a reduction in both loans and ~~deposits.~~borrowings.

Shareholders’ equity increased ~~$3.9~~$6.8 million, or ~~7.6%~~11.3%, to ~~$54.3~~$66.8 million as of June 30, ~~2020,~~2021, from ~~$50.5~~$60.0 million as of December 31, ~~2019.~~2020. See analysis of shareholders’ equity in the section captioned “Capital Resources and Regulatory Capital Requirements” included elsewhere in this discussion.

Results of Operations for the Three and Six Months Ended June 30,~~, 20~~20 2021 and ~~201~~92020

Details of the changes in the various components of net income are discussed below.

Net interest income is the difference between interest income on interest-earning assets, such as loans, investment securities, and interest-bearing cash, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Changes in net interest income result from changes in volume and spread, and are reflected in the net interest margin, as well as changes in average interest rates. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Margin refers to net interest income divided by average interest-earning assets, and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.

~~Table~~

The Federal Reserve influences the general market rates of ~~Contents~~

interest, including the deposit and loan rates offered by many financial institutions. The effective federal funds rate decreased 150 basis points during March 2020 (50 basis points on March 3, 2020 and 100 basis points on March 15, 2020) to zero to 0.25%, where it remained through June 30, 2021.

The following tables ~~presents~~present the changes in net interest income and identifies the changes due to differences in the average volume of interest-earning assets and interest–bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities. The changes in net interest income due to changes in both average volume and average interest rate have been allocated to the average volume change or the average interest rate change in proportion to the absolute amounts of the change in each.

Three Months Ended June 30, ~~2020~~2021 and ~~2019~~2020

Three Months Ended

June 30, 2020 vs June 30, 2019

Increase (Decrease) Due to Change in

(In thousands)

Rate

Average
Volume

Total

Interest-bearing deposits and federal funds sold
$ (83
)
$ 15 $ (68 )
Securities
(17
)
22 5
Loans, net of unearned discount ⁽¹⁾
(1,080
)
1,399 319
Total earning assets
(1,180
)
1,436 256

Savings and interest-bearing demand
(1
)
2 1
Money market deposit accounts
(174
)
36 (138 )
Time deposits
(290
)
442 152
FHLB and other borrowings
(56
)
19 (37 )
Subordinated notes
(1
)
- (1 )
Total interest-bearing liabilities
(522
)
499 (23 )

Changes in net interest income
$ (658
)
$ 937 $ 279

	Three Months Ended June 30, 2021 vs June 30, 2020
	Increase (Decrease) Due to Change in
(In thousands)	Rate			Average Volume			Total
Interest-bearing deposits and federal funds sold	$	2		$	(5	)	$	(3	)
Securities		(11	)		8			(3	)
Loans, net of unearned discount ⁽¹⁾		674			826			1,500
Total earning assets		665			829			1,494

Savings and interest-bearing demand		(2	)		3			1
Money market deposit accounts		(8	)		10			2
Time deposits		(437	)		(192	)		(629	)
FHLB and other borrowings		(4	)		59			55
Subordinated notes		(1	)		1			-
Total interest-bearing liabilities		(452	)		(119	)		(571	)

Changes in net interest income	$	1,117		$	948		$	2,065

(1)

Average loans include non-accrual.

Table of Contents

Net interest income increased ~~$279,000,~~$2.1 million, or ~~9.3%~~63.6%, from ~~$3.0 million for the three months ended June 30, 2019, to~~ $3.3 million for the three months ended June 30, ~~2020.~~2020 to $5.3 million for the three months ended June 30, 2021. Net interest margin for the three months ended June 30, 2021 and 2020 was 4.11% and ~~2019 was~~ 2.74% ~~and 4.05%~~, ~~a decrease~~respectively, an increase of ~~131~~137 basis points. The increase in net interest income and margin was primarily due to the timing of recognition of PPP-related SBA fees. Other changes included an increase in the average volume of loans, ~~and~~a decrease in average rates paid on interest-bearing deposits and ~~borrowings, partly offset by a~~ decrease ~~in average yields on earning assets and increase~~ in average volume of interest-bearing deposits which were replaced by non-interest-bearing deposits and Paycheck Protection Program Liquidity Facility (“PPPLF”) borrowings.

The average volume of ~~loans~~interest-earning assets increased ~~$117.3~~$41.5 million, or ~~45.2%~~8.7%, from ~~$259.5~~$478.2 million for the three months ended June 30, ~~2019~~2020 to $519.7 million for the three months ended June 30, 2021. The average volume of loans increased $59.2 million, or 15.7%, from $376.8 million for the three months ended June 30, 2020 ~~and the average yield for loans decreased 165 basis points from 6.45%~~to $436.0 million for the three months ended June 30, ~~2019 to~~2021. PPP loans accounted for $31.1 million of the average volume increase. The average yield for loans increased 71 basis points from 4.80% for the three months ended June 30, ~~2020.~~2020 to 5.51% for the three months ended June 30, 2021. In April 2020, we began originating loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. In 2020, we funded $98.3 million of PPP loans, ~~account for $64.9~~all during the second quarter of 2020. As of June 30, 2021, approximately $75.6 million of the ~~average volume increase. The changes compared to last year~~PPP loans originated in 2020 have been ~~impacted~~forgiven by the ~~recent short-term interest rate cuts~~SBA and were paid off or repaid by the ~~interest rate that~~borrower, leaving an outstanding balance of $22.7 million as of June 30, 2021. During the six months ended June 30, 2021, we funded an additional $66.2 million of PPP loans, ~~carry~~ of ~~1.00%,~~which $2.6 million have been forgiven by the SBA and were paid off or repaid by the borrower, leaving an outstanding balance of $63.6 million as ~~well~~of June 30, 2021. Total outstanding PPP loans were $86.3 million as of June 30, 2021. During the ~~timing~~three months ended June 30, 2021, we recognized $1.2 million in PPP loan related deferred fees (net of ~~recognition~~amortization of ~~the~~ related ~~SBA loan fees,~~deferred origination costs) as a yield adjustment and ~~increased liquidity~~this amount is included in interest income on ~~the balance sheet. See~~ ~~Paycheck Protection Loans~~ under Loan Portfolio Composition within the discussion of our financial position below for more information. The Company expects to see continued volatility in the economic markets and government responses to these changes asloans. As a result of the ~~COVID-19 pandemic. These changing conditions and governmental responses could have impacts~~inclusion of these net fees in interest income, the average yield on PPP loans was 6.1% during the three months ended June 30, 2021. For the balance ~~sheet and income statement~~ of PPP loans outstanding as of June 30, 2021, we expect to recognize additional PPP loan related deferred fees (net of deferred origination costs) totaling approximately $2.1 million as a yield adjustment over the ~~Company for~~remaining expected lives of these loans, with the ~~remainder of the year.~~majority being in 2021.

~~Average~~The average volume of interest-bearing ~~deposits~~liabilities increased ~~$136.8~~$13.4 million, or ~~63.2%~~3.4%, from ~~$216.6~~$392.5 million for the three months ended June 30, ~~2019,~~2020 to $405.9 million for the three months ended June 30, 2021. The average volume of interest-bearing deposits decreased $53.9 million, or 15.3%, from $353.4 million for the three months ended June 30, 2020 to $299.5 million for the three months ended June 30, 2021, and the average interest rate paid on interest-bearing deposits decreased 8459 basis points from ~~2.22% for the three months ended June 30, 2019 to~~ 1.38% for the three months ended June 30, ~~2020.~~2020 to 0.79% for the three months ended June 30, 2021. Non-interest bearing deposits increased $17.5 million, or 32.4%, from $54.0 million for the three months ended June 30, 2020 to $71.5 million for the three months ended June 30, 2021. The average cost of deposits during the three months ended June 30, ~~2020~~2021 was impacted by decreases in interest rates paid on money market and time deposits as a result of the aforementioned decrease in market interest rates. The average volume of FHLB and other borrowings increased $67.4 million, or 248.6%, from $27.1 million for the three months ended June 30, 2020 to $94.5 million for the three months ended June 30, 2021, consisting entirely of funding from the PPPLF, at an interest rate of 0.35%, used to fund the PPP loans. There were no borrowings from the FHLB for the three months ended June 30, 2021 and 2020.

~~Table of Contents~~

Six Months Ended June 30, ~~2020~~2021 and ~~2019~~2020

Six Months Ended

June 30, 2020 vs June 30, 2019

Increase (Decrease) Due to Change in
(In thousands)

Rate

Average
Volume

Total

Interest-bearing deposits and federal funds sold
$ (134
)
$ 61 $ (73
)
Securities
80 28 108
Loans, net of unearned discount ⁽¹⁾
(1,028
)
2,257 1,229
Total earning assets
(1,082
)
2,346 1,264

Savings and interest-bearing demand
- 4 4
Money market deposit accounts
(224
)
87 (137
)
Time deposits
(414
)
674 260
FHLB and other borrowings
(109
)
23 (86
)
Subordinated notes
(1
)
- (1
)
Total interest-bearing liabilities
(748
)
788 40

Changes in net interest income
$ (334
)
$ 1,558 $ 1,224

	Six Months Ended June 30, 2021 vs June 30, 2020
	Increase (Decrease) Due to Change in
(In thousands)	Rate			Average Volume			Total
Interest-bearing deposits and federal funds sold	$	(56	)	$	(5	)	$	(61	)
Securities		(203	)		34			(169	)
Loans, net of unearned discount ⁽¹⁾		131			2,791			2,922
Total earning assets		(128	)		2,820			2,692

Savings and interest-bearing demand		(7	)		5			(2	)
Money market deposit accounts		(148	)		49			(99	)
Time deposits		(881	)		(241	)		(1,122	)
FHLB and other borrowings		(23	)		126			103
Subordinated notes		-			-			-
Total interest-bearing liabilities		(1,059	)		(61	)		(1,120	)

Changes in net interest income	$	931		$	2,881		$	3,812

(1)

Average loans include non-accrual.

Table of Contents

Net interest income increased ~~$1.2~~$3.8 million, or ~~21.1%~~55.1%, from ~~$5.7 million for the six months ended June 30, 2019, to~~ $6.9 million for the six months ended June 30, ~~2020.~~2020 to $10.7 million for the six months ended June 30, 2021. Net interest margin for the six months ended June 30, 2021 and 2020 was 4.28% and ~~2019 was~~ 3.37% ~~and 3.93%~~, respectively, ~~a decrease~~an increase of 5691 basis points. The increase in net interest income and margin was primarily due to the timing of recognition of PPP-related SBA fees. Other changes included an increase in the average volume of loans, ~~and~~a decrease in average rates paid on interest-bearing deposits and borrowings ~~partly offset by a~~and decrease ~~in average yields on earning assets and increase~~ in average volume of interest-bearing deposits which were replaced by non-interest-bearing deposits and PPPLF borrowings. ~~The Company expects to see continued volatility in the economic markets and government responses to the COVID-19 pandemic.~~

The average volume of ~~loans~~interest-earning assets increased ~~$81.7~~$92.9 million, or ~~32.0%~~22.6%, from ~~$255.4~~$410.6 million for the six months ended June 30, ~~2019,~~2020 to $503.5 million for the six months ended June 30, 2021. The average volume of loans increased $100.3 million, or 29.8%, from $337.1 million for the six months ended June 30, 2020 ~~and the average yield for loans decreased 81 basis points from 6.32%~~to $437.4 million for the six months ended June 30, ~~2019 to~~2021. PPP loans accounted for $67.2 million of the average volume increase. The average yield for loans increased 9 basis points from 5.51% for the six months ended June 30, ~~2020. The changes compared~~2020 to ~~last year have been impacted~~5.60% for the six months ended June 30, 2021. In April 2020, we began originating loans to qualified small businesses under the PPP administered by the ~~recent short-term interest rate cuts and increased liquidity on~~SBA under the ~~balance sheet. The Company expects to see continued volatility~~provisions of the CARES Act. See discussion above in the ~~economic markets~~three months ended June 30, 2021 and ~~government responses to these changes~~2020. During the six months ended June 30, 2021, we recognized $2.9 million in PPP loan related deferred fees (net of amortization of related deferred origination costs) as a yield adjustment and this amount is included in interest income on loans. As a result of the ~~COVID-19 pandemic. These changing conditions and governmental responses could have impacts~~inclusion of these net fees in interest income, the average yield on PPP loans was 6.8% during the ~~balance sheet and income statement of the Company for the remainder of the year.~~six months ended June 30, 2021.

~~Average~~The average volume of interest-bearing ~~deposits~~liabilities increased ~~$92.7~~$63.4 million, or ~~43.3%~~18.9%, from ~~$214.4~~$334.8 million for the six months ended June 30, ~~2019,~~2020 to $398.1 million for the six months ended June 30, 2021. The average volume of interest-bearing deposits decreased $9.3 million, or 3.1%, from $307.1 million for the six months ended June 30, 2020 to $297.8 million for the six months ended June 30, 2021, and the average interest rate paid on interest-bearing deposits decreased 5877 basis points from ~~2.20% for the six months ended June 30, 2019 to~~ 1.62% for the six months ended June 30, ~~2020.~~2020 to 0.85% for the six months ended June 30, 2021. Non-interest bearing deposits increased $19.2 million, or 42.6%, from $45.0 million for the six months ended June 30, 2020 to $64.2 million for the six months ended June 30, 2021. The average cost of deposits during the six months ended June 30, ~~2020~~2021 was impacted by decreases in interest rates paid on money market and time deposits as a result of the aforementioned decrease in market interest rates. The average volume of FHLB and other borrowings increased $72.7 million, or 466.0%, from $15.6 million for the six months ended June 30, 2020 to $88.3 million for the six months ended June 30, 2021, consisting mostly of funding from the PPPLF, at an interest rate of 0.35%, used to fund the PPP loans. The average cost of FHLB and other borrowings decreased 29 basis points from 0.64% for the six months ended June 30, 2020 to 0.35% for the six months ended June 30, 2021.

~~Table of Contents~~

The following table sets forth our average balances of assets, liabilities and shareholders’ equity, in addition to the major components of net interest income and our net interest margin, for the three months ended June 30, ~~2020~~2021 and ~~2019.~~2020.

Three Months Ended June 30,

2020

2019

(In thousands, except percentages)

Average
Balance

Interest

Average
Yield

Average
Balance

Interest

Average
Yield

Assets

Interest-bearing deposits and federal funds sold

$
77,139

$
19

0.10
%

$
14,439

$
87

2.42
%
Securities

24,281

210

3.48

21,703

205

3.79

Loans, net of unearned discount ⁽¹⁾

376,803

4,493

4.80

259,505

4,174

6.45

Total earning assets

478,223

4,722

3.97

295,647

4,466

6.06

Cash and other assets

29,830

30,223

Allowance for loan losses

(2,216
)

(954
)

Total assets

$
505,837

$
324,916

Liabilities and Shareholders’ Equity

Savings and interest-bearing demand

$
10,036

8

0.32
%

$
7,496

7

0.37
%
Money market deposit accounts

101,161

98

0.39

63,562

236

1.49

Time deposits

242,220

1,107

1.84

145,503

955

2.63

Total interest-bearing deposits

353,417

1,213

1.38

216,561

1,198

2.22

FHLB and other borrowings

27,093

27

0.40

7,808

64

3.29

Subordinated notes

12,000

219

7.34

12,000

220

7.35

Total interest-bearing liabilities

392,510

1,459

1.50

236,369

1,482

2.51

Non-interest-bearing deposits

54,009

34,242

Other liabilities

6,477

5,929

Total liabilities

452,996

277,299

Shareholders’ equity

52,841

48,376

Total liabilities and shareholders’ equity

$
505,837

$
324,916

Net interest income

$
3,263

$
2,984

Net interest spread

2.47
%

3.55
%
Net interest margin

2.74
%

4.05
%

	Three Months Ended June 30,
	2021								2020
(In thousands, except percentages)	Average Balance			Interest		Average Yield			Average Balance			Interest		Average Yield
Assets
Interest-bearing deposits and federal funds sold	$	58,444		$	16		0.11	%	$	77,139		$	19		0.10	%
Securities		25,197			207		3.30			24,281			210		3.48
Loans, net of unearned discount ⁽¹⁾		436,020			5,993		5.51			376,803			4,493		4.80
Total earning assets		519,661			6,216		4.80			478,223			4,722		3.97
Cash and other assets		32,761								29,830
Allowance for loan losses		(3,193	)							(2,216	)
Total assets	$	549,229							$	505,837
Liabilities and Shareholders’ Equity
Savings and interest-bearing demand	$	15,371			9		0.23	%	$	10,036			8		0.32	%
Money market deposit accounts		112,089			100		0.36			101,161			98		0.39
Time deposits		172,000			478		1.11			242,220			1,107		1.84
Total interest-bearing deposits		299,460			587		0.79			353,417			1,213		1.38
FHLB and other borrowings		94,455			82		0.35			27,093			27		0.40
Subordinated notes		12,000			219		7.32			12,000			219		7.34
Total interest-bearing liabilities		405,915			888		0.88			392,510			1,459		1.50
Non-interest-bearing deposits		71,547								54,009
Other liabilities		7,961								6,477
Total liabilities		485,423								452,996
Shareholders’ equity		63,806								52,841
Total liabilities and shareholders’ equity	$	549,229							$	505,837

Net interest income				$	5,328							$	3,263
Net interest spread							3.92	%							2.47	%
Net interest margin							4.11	%							2.74	%

(1)

Includes non-accrual loans.

Table of Contents

The following table sets forth our average balances of assets, liabilities and shareholders’ equity, in addition to the major components of net interest income and our net interest margin, for the six months ended June 30, ~~2020~~2021 and ~~2019.~~2020.

Six Months Ended June 30,

2020

2019

(In thousands, except percentages)

Average
Balance

Interest

Average
Yield

Average
Balance

Interest

Average
Yield

Assets

Interest-bearing deposits and federal funds sold

$
50,471

$
82

0.33
%

$
12,813

$
155

2.44
%
Securities

23,073

522

4.55

21,834

414

3.82

Loans, net of unearned discount ⁽¹⁾

337,100

9,234

5.51

255,433

8,005

6.32

Total earning assets

410,644

9,838

4.82

290,080

8,574

5.96

Cash and other assets

29,309

29,742

Allowance for loan losses

(1,820
)

(915
)

Total assets

$
438,133

$
318,907

Liabilities and Shareholders’ Equity

Savings and interest-bearing demand

$
9,646

18

0.37
%

$
7,335

14

0.38
%
Money market deposit accounts

82,456

297

0.72

58,692

434

1.49

Time deposits

215,018

2,156

2.02

148,350

1,896

2.58

Total interest-bearing deposits

307,120

2,471

1.62

214,377

2,344

2.20

FHLB and other borrowings

15,643

50

0.64

8,395

136

3.27

Subordinated notes

12,000

437

7.32

12,000

438

7.36

Total interest-bearing liabilities

334,763

2,958

1.78

234,772

2,918

2.51

Non-interest-bearing deposits

45,034

36,451

Other liabilities

6,718

5,465

Total liabilities

386,515

276,688

Shareholders’ equity

51,618

42,219

Total liabilities and shareholders’ equity

$
438,133

$
318,907

Net interest income

$
6,880

$
5,656

Net interest spread

3.04
%

3.45
%
Net interest margin

3.37
%

3.93
%

	Six Months Ended June 30,
	2021								2020
(In thousands, except percentages)	Average Balance			Interest		Average Yield			Average Balance			Interest		Average Yield
Assets
Interest-bearing deposits and federal funds sold	$	40,555		$	21		0.10	%	$	50,471		$	82		0.33	%
Securities		25,566			353		2.78			23,073			522		4.55
Loans, net of unearned discount ⁽¹⁾		437,395			12,156		5.60			337,100			9,234		5.51
Total earning assets		503,516			12,530		5.02			410,644			9,838		4.82
Cash and other assets		31,951								29,309
Allowance for loan losses		(3,070	)							(1,820	)
Total assets	$	532,397							$	438,133
Liabilities and Shareholders’ Equity
Savings and interest-bearing demand	$	13,740			16		0.23	%	$	9,646			18		0.38	%
Money market deposit accounts		109,602			198		0.36			82,456			297		0.72
Time deposits		174,470			1,034		1.20			215,018			2,156		2.02
Total interest-bearing deposits		297,812			1,248		0.85			307,120			2,471		1.62
FHLB and other borrowings		88,318			153		0.35			15,643			50		0.64
Subordinated notes		12,000			437		7.34			12,000			437		7.32
Total interest-bearing liabilities		398,130			1,838		0.93			334,763			2,958		1.78
Non-interest-bearing deposits		64,205								45,034
Other liabilities		8,158								6,718
Total liabilities		470,493								386,515
Shareholders’ equity		61,904								51,618
Total liabilities and shareholders’ equity	$	532,397							$	438,133

Net interest income				$	10,692							$	6,880
Net interest spread							4.09	%							3.04	%
Net interest margin							4.28	%							3.37	%

(1)

Includes non-accrual loans.

Provision for Loan Losses

For the three and six months ended June 30, 2021, the provision for loan losses totaled $141,000 and $569,000, respectively, compared to $475,000 and $1.3 million for the three and six months ended June 30, 2020, respectively. Included in the provision for the six months ended June 30, 2021 was $130,000, which represents the amount of reserve for loan loss required in excess of the discount balance on loans acquired, compared to $409,000 for the six months ended June 30, 2020. We determined a provision for loan losses that we consider sufficient to maintain an allowance to absorb probable losses inherent in our portfolio as of the balance sheet date.

For additional information concerning this determination, see the section captioned “Allowance for Loan Losses” elsewhere in this discussion.

For the three and six months ended June 30, 2020, the provision for loan losses totaled $475,000 and $1.3 million, respectively, compared to $400,000 and $483,000 for the three and six months ended June 30, 2019. See the section captioned “Allowance for Loan Losses” included elsewhere in this discussion for further analysis of the provision for loan losses.

Table of Contents

Non-Interest Income

The components of non-interest income were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

2020

2019

2020

2019

Trust income
$ 1,196 $ 1,250 $ 2,472 $ 2,431
Gain on sale of loans
- - 432 -
Advisory income
2,311 2,466 4,805 4,668
Brokerage income
1,790 2,894 3,861 4,956
Service fees and other income
1,222 1,096 2,959 2,734
Rental income
57 81 148 163
Total
$ 6,576 $ 7,787 $ 14,677 $ 14,952

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2021		2020		2021		2020
Trust income	$	1,532	$	1,196	$	2,972	$	2,472
Gain on sale of loans		101		-		101		432
Advisory income		3,276		2,311		6,293		4,805
Brokerage income		1,895		1,790		4,360		3,861
Service fees and other income		1,408		1,222		3,714		2,959
Rental income		88		57		176		148
Total	$	8,300	$	6,576	$	17,616	$	14,677

Total non-interest income for the three ~~and six~~ months ended June 30, ~~2020 decreased $1.2~~2021 increased $1.7 million, or ~~15.6%~~25.8%, and ~~$275,000,~~$2.9 million, or ~~1.8%~~19.7%, compared to the same periods in the prior ~~year, respectively.~~year. Material changes in the various components of non-interest income are discussed below.

Trust Income. Trust income is earned for trust services on the value of managed and non-managed assets held in custody. Volatility in the bond and equity markets impacts the market value of trust assets and the related fees. Trust income for the three and six months ended June 30, ~~2020 decreased $54,000,~~2021 increased $336,000, or ~~4.3%~~28.1%, and increased ~~$41,000,~~$500,000, or ~~1.7%~~20.2%, respectively, compared to the same periods in the prior ~~year, respectively.~~year. The ~~variance~~increase in the fee income between the periods is due to ~~a decrease~~an increase in the average market value of the trust assets during the three and six months ended June 30, ~~2020,~~2021, compared to the three and six months ended June 30, ~~2019, combined with a slightly larger increase in the average market value~~2020. The expectation of ~~the trust assets during the first quarter of 2020 compared with the same period in the prior year, which slightly offset the decrease in the second quarter. The~~an economic ~~disruption caused by~~recovery from the COVID-19 pandemic has increased market values of trust assets over those experienced during the three and six months ended June 30, 2020, when the impacts of the COVID-19 pandemic were affecting expectations, causing extreme volatility ~~which has resulted~~and decreasing fees during the three and six month periods in ~~a decrease~~the prior year. Volatility related to an uneven recovery from the economic downturn and/or renewed fears of resurgent strains of the COVID-19 virus, including the emergence of the Delta variant, could result in future net decreases in the average values of our assets held in custody, ~~which may be sustained and could materially worsen,~~and/or continued volatility in asset values, potentially decreasing our trust income.

Gain on sale of loans. Gain on sale of loans is generally gain on sales of the guaranteed portion of loans within our SBA loan portfolio. ~~There~~Gain on sale of loans increased $101,000 during the three months ended June 30, 2021 compared to the same period in the prior year, when there was no gain on sale of loans, and decreased $331,000, or 76.6%, for the ~~three~~six months ended June 30, ~~2020 and 2019.~~2021 compared to the same period in the prior year. Gain on sale of loans for the three and six months ended June 30, ~~2020~~2021 was ~~$432,000,~~$101,000, resulting from the sale of ~~$6.2~~$1.1 million of SBA loans. ~~There were no loan sales for the same period in the prior year.~~

Advisory income. Advisory fees are typically based on a percentage of the underlying average asset values for a given period, where each percentage point represents 100 basis points. These revenues are of a recurring nature, but are directly affected by increases and decreases in the values of the underlying assets. For the three and six months ended June 30, ~~2020,~~2021, advisory income ~~decreased $155,000,~~increased $965,000, or ~~6.3%~~41.8%, and ~~increased $137,000,~~$1.5 million, or ~~2.9%~~31.0%, compared to the same periods in the prior ~~year, respectively.~~year. The ~~decrease~~increase in advisory income ~~for~~between the ~~three month period~~two periods is due to ~~a decrease~~an increase in the average market value of the advisory assets during the three months ended June 30, 2020, compared to the same period in the prior year. This decrease during this three month period was slightly offset by an increase in advisory income during the three months ended March 31, 2020 compared to the same period in the prior year, which combined resulted in a net increase in advisory income for theand six months ended June 30, ~~2020~~2021 as compared to the same ~~period~~periods in the prior year. Similar to our trust income, ~~any decrease~~changes in the value of our assets under management will result in a comparable ~~decrease~~changes in our advisory income. The expectation of an economic ~~disruption caused by~~recovery from the COVID-19 pandemic has increased market values of our advisory assets, whereas the economic disruption caused by the start of the COVID-19 pandemic during the three and six months ended June 30, 2020 increased market volatility ~~which has resulted~~leading to lower advisory fees in ~~a decrease~~the same periods in the prior year. Volatility related to an uneven recovery from the economic downturn and/or renewed fears of resurgent strains of the COVID-19 virus, including the emergence of the Delta variant, could result in future net decreases in the average values of our advisory assets, ~~under management, which may be sustained and could materially worsen,~~and/or continued volatility in asset values, potentially decreasing our advisory income.

Brokerage income. Brokerage revenues are generally based on a per share fee or commission to trade a share of a particular stock, bond or other security. In addition, brokerage revenues, in this context, include private placements, participation in syndication of public offerings, and certain other brokerage revenues, including interest earned on margin lending. Brokerage revenue is dependent on the volume of trading, and on private placement and syndication activity during the ~~period.~~period, and in the case of margin lending, on interest rates. Brokerage income for the three and six months ended June 30, ~~2020 decreased $1.1 million,~~2021 increased $105,000, or ~~38.1%~~5.9%, and ~~$1.1 million,~~$499,000, or ~~22.1%~~12.9%, ~~respectively,~~ compared to the same periods in the prior year. The economic disruption related to the COVID-19 pandemic ~~has~~ led to a dramatic slowing of activity that began late in the first quarter 2020 and continued throughout the remainder of the year. This led to delays in the timing of private placements and syndicated public offerings, ~~on which margins have historically been higher. This~~along with volatility in the volume of general trading activity. Private offering and syndicated public offering activity may face a prolonged recovery, ~~materially~~and in the event of economic volatility related to an uneven recovery or concerns over new strains of the COVID-19 virus, including the emergence of the Delta variant, the recovery in trading activity may stall, potentially decreasing brokerage income. During the first quarter 2020, this effect was offset by a temporary increase in certain segments of trading activity which are typically done at lower margins. This increase was not sustained into the second quarter.income overall.

Table of Contents

The ~~chart~~table below reflects a rollforward of our client assets, which includes both advisory and brokerage assets, as of June 30, ~~2020,~~2021 and December 31, ~~2019~~2020, and the inflows and outflows and net market appreciation during the three and six months ended June 30, ~~2019.~~2021. Our brokerage and advisory assets experienced an increase of approximately $348 million, or 7.0%, and $765 million, or 16.9%, during the three and six months ended June 30, 2021, respectively, related to positive net flows and market appreciation.

(In thousands)

June 30, 2020

December 31, 2019

June 30, 2019

Advisory assets

Tectonic Advisors
$ 2,020,209 $ 2,057,570 $ 1,959,393
Sanders Morris
520,284 560,820 400,972
Total advisory assets
$ 2,540,493 $ 2,618,390 $ 2,360,365

Brokerage assets – Sanders Morris
$ 1,286,924 $ 1,426,828 $ 1,372,881

Total advisory and brokerage assets
$ 3,827,417 $ 4,045,218 $ 3,733,246

(In thousands)	Client Assets
As of December 31, 2020	$	4,524,376
Client inflows		519,177
Client outflows		(437,760	)
Net flows		81,417
Market appreciation		335,882
As of March 31, 2021	$	4,941,675
Client inflows		995,914
Client outflows		(861,884	)
Net flows		134,030
Market appreciation		213,754
As of June 30, 2021	$	5,289,459

Service fees and other income. Service fees includes fees for deposit-related services, loan servicing, and ~~third party~~third-party administration fees. Service fees and other income for the three and six months ended June 30, ~~2020~~2021 increased ~~$126,000,~~$186,000, or ~~11.5%~~15.2%, and ~~$225,000,~~$755,000, or ~~8.2%~~25.5%, respectively, compared to the same period in the prior year. ~~This is~~These increases are primarily the result of increases in third party administration fees of $203,000 and $662,000 for the three and six months ended June 30, 2021 over the same periods in the prior year. The increase in third-party administration fees was in part due to the COVID-19 pandemic and the resulting lag in information from plan sponsors to complete annual plan administration work related to the shutdown of dental practices nationwide, which began in March 2020, whereas during the three and six months ended June 30, 2021, information was received timely and therefore, a larger percentage of plan administration work was able to be completed earlier; this effect was more pronounced during the first quarter 2021. Loan and other bank servicing fees decreased $48,000 and increased $110,000 during the three and six months ended June 30, 2021, respectively, over the same periods in the prior year, primarily due to the amortization of the remaining servicing asset valuation allowance on loans repaid during the three and six months ended June 30, 2021 of $45,000 and $70,000, respectively. In addition, other income increased $30,000 and decreased $16,000 for the three and six months ended June 30, 2021 related to variances in income distributions from an interest in securities not readily marketable which decreased $22,000 and increased $63,000 during the three and six months ended June 30, 2021, respectively, compared to the same periods in the prior year, and an increase in consulting fees earned at Sanders Morris of $34,000 and $56,000 for the three and six months ended June 30, 2021, respectively, and a decrease in other income of approximately $124,000 related to a non-recurring extinguishment of a retirement liability during the first quarter of 2020, and immaterial fluctuations in miscellaneous income netting to an increase of $20,000 and a decrease of $11,000 for the three and six months ended June 30, 2020 and bad debt expense recognized during the six months ended June 30, 2019, partially offset by a decrease in third party administration fees. The decrease in third party administration fees is due to a lag in information from plan sponsors to complete annual plan administration work. The vast majority of Nolan’s plan administration clients are dental practices. Nolan believes that the timing lag is at least partially related to the shutdown of dental practices nationwide during the COVID-19 pandemic. The Company expects that there will be a lag in the timing of the completion of plan administration for 2020 compared to 2019, which would impact the timing of revenue recognition for third party administration fees compared to the corresponding periods in 2019, although the timing lag recovered somewhat during the three months ended June 30, 2020.2021, respectively.

Rental income. The Company receives monthly rental income from tenants leasing space in the Bank building. Rental income for the three and six months ended June 30, ~~2020 decreased $24,000,~~2021 increased $31,000, or ~~29.6%~~54.4% and $28,000 or 18.9%, ~~and $15,000, or 9.2%,~~respectively, compared to the same periods in the prior ~~year,~~year. The increase was primarily due to a new tenant moving into vacant space during the ~~granting of rent abatements and one tenant’s lease reaching the end of its term and subsequent nonrewal.~~second quarter 2021.

Non-Interest Expense

The components of non-interest expense were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

2020

2019

2020

2019

Salaries and employee benefits
$ 4,049 $ 4,869 $ 8,953 $ 9,252
Occupancy and equipment
585 636 1,210 1,249
Trust expenses
372 499 927 976
Brokerage and advisory direct costs
560 451 1,046 870
Professional fees
284 418 676 863
Data processing
202 220 401 449
Other
611 679 1,273 1,309
Total
$ 6,663 $ 7,772 $ 14,486 $ 14,968

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2021		2020		2021		2020
Salaries and employee benefits	$	5,790	$	4,049	$	11,558	$	8,953
Occupancy and equipment		392		560		819		1,094
Trust expenses		595		372		1,159		927
Brokerage and advisory direct costs		491		560		997		1,046
Professional fees		332		267		782		642
Data processing		266		194		470		385
Other		834		661		1,609		1,439
Total	$	8,700	$	6,663	$	17,394	$	14,486

Table of Contents

Total non-interest expense for the three and six months ended June 30, ~~2020 decreased $1.1~~2021 increased $2.0 million, or ~~14.3%~~29.9%, and ~~$482,000,~~$2.9 million, or ~~3.2%~~20.0%, respectively, compared to the same periods in the prior year, primarily due to ~~decreases~~increases in salaries and employee benefits, trust expenses, other expenses, and professional fees, ~~other expenses, and~~as well as in data processing fees, which were partially offset by a decrease in depreciation expense within our occupancy and equipment ~~partly offset by increases~~expense and in brokerage and advisory direct costs. Material changes in the various components of non-interest income are discussed below.

Salaries and employee benefits. Salaries and employee benefits for the three and six months ended June 30, ~~2020 decreased $820,000,~~2021 increased $1.7 million, or ~~16.8%~~43.0%, and ~~decreased $299,000,~~$2.6 million, or ~~3.2%~~29.1%, respectively, compared to the same period in the prior year. The ~~decreases~~increases were primarily due to ~~decreases~~annual merit increases, increases in bonuses, and related payroll taxes at our Banking segment, in addition to annual merit increases and increases in commissions ~~earnouts~~ and incentive bonuses and payroll taxes in our Other Financial Services segment. In addition, stock compensation expense increased in our HoldCo segment, and our health insurance costs increase across the Company, compared to the same periods in the prior year. In our Banking segment, $1.1 million and $1.2 million of ~~$496,000 and $155,000 within our other financial services segment~~the increase for the three and six months ended June 30, ~~2020,~~2021, respectively, ~~primarily~~ related to ~~decreases~~merit increases in salaries and an increase in headcount in the Bank’s SBA lending division and elsewhere related to overall growth in the Bank. In our Other Financial Services segment, $162,000 and $386,000 of the increase for the three and six months ended June 30, 2021, respectively, related to merit increases in salaries and an increase in headcount related to growth in The Nolan Company (“Nolan”), operating as a division within the Bank, which provides third party administration (“TPA”) services, and $215,000 and $272,000 related to salary increases at Sanders Morris. In addition, there was a net increase in earnouts and incentive bonuses at Sanders Morris related to increases in brokerage commission activity ~~including private placement activity, at Sanders Morris,~~of $158,000 and $250,000 during the three and six months ended June 30, 2021 compared to the same periods in the prior year, during which the COVID-19 pandemic had begun to suppress private placements and ~~decreases~~syndicated offerings, as well as certain trading activity on which Sanders Morris earns higher margins, which recovered somewhat during the three and six months ended June 30, 2021. These increases at Sanders Morris were partially offset by a decrease in ~~salaries~~certain incentive bonuses at Sanders Morris. Stock compensation expense increased by $58,000 and ~~employee benefits in our Banking segment of $408,000 and $317,000~~$118,000 for the three and six months ended June 30, ~~2020,~~2021, respectively, ~~resulting from recording a portion of fees received from the SBA as an offset to employee costs~~ related to ~~origination of PPP loans, partly offset by annual merit increases and increase in staff. These decreases were partially~~stock grants made on September 30, 2020, offset by a ~~change~~decrease in expense related to options granted, and bonus expense in our Holdco segment decreased $12,500 and increased $25,000, respectively, related to variations in bonus accrued compared to the ~~manner~~same periods in the prior year. Increases in health insurance expense led increased benefit costs across the Company, which ~~our chief executive officer was paid, which increase was entirely offset~~increased by ~~a reduction~~$74,000 and $121,000 during the three and six months ended June 30, 2021, respectively, compared to the same periods in ~~management fees noted below under other expense (resulting in no additional amount being paid to our chief executive officer).~~the prior year.

~~Table of Contents~~

Occupancy and equipment expense. Occupancy and equipment expense for three and six months ended June 30, ~~2020~~2021 decreased ~~$51,000,~~$168,000, or ~~8.0%~~30.0%, and ~~decreased $39,000,~~$275,000, or ~~3.1%~~25.1%, respectively, compared to the same periods in the prior ~~year,~~year. The decrease is attributable to decreases of $16,000 and $84,000 for the three and six months ended June 30, 2021, respectively, in depreciation expense at our Other Financial Services segment related primarily ~~due~~ to a group of fixed assets and software costs reaching full depreciation/amortization during the three months ended June 30, ~~2020.~~2020, and decreases in rent, utilities and common area maintenance expenses in that segment of $67,000 and $101,000 for the three and six month periods, respectively, slightly offset by an increase in repairs and maintenance expense of $7,000 for the six months ended June 30, 2021, and decreases in facilities telephone and depreciation of $16,000 and $8,000, respectively, in our Banking segment.

Trust expenses. Trust expenses are advisory fees paid to a fund advisor to advise the Company on the common trust funds managed by the Company, and are based on the value of the assets held in custody. Volatility in the bond and equity markets impacts the market value of trust assets and the related expenses. The monthly advisory fees are assessed based on the market value of assets at month-end. Trust expenses ~~decreased $127,000,~~increased $223,000, or ~~25.5%~~59.9%, and ~~decreased $49,000,~~$232,000, or ~~5.0%~~25.0%, ~~for the three and six months ended June 30, 2020, respectively,~~ due to ~~a decrease~~an increase in the market value of trust assets for the three and six months ended June 30, ~~2020~~2021 over ~~that~~the market values during the ~~three and six months ended June 30, 2019, as discussed under Non-Interest Income and within~~same periods in the prior year, which represented a recovery in asset values based on expectations that the effects of the COVID-19 ~~Update, above.~~pandemic were easing.

Brokerage and advisory direct costs. Brokerage and advisory direct costs for three and six months ended June 30, ~~2020 increased $109,000,~~2021 decreased $69,000, or ~~24.2%~~12.3%, and ~~increased $176,000,~~$49,000, or ~~20.2%~~4.7%, respectively, compared to the same periods in the prior ~~year,~~year. The decreases related primarily to ~~volume increases~~decreases in ~~certain segments~~brokerage and exchange clearing fees at Sanders Morris of ~~brokerage activity driven by market volatility, leading to increases in ticket based charges, as well as clearing firm~~approximately $66,000 and ~~other service fees. These increases were slightly offset by nominal decreases~~$28,000, for the three and six months ended June 30, 2021, respectively, and in information services and referral ~~fees.~~fees of $3,000 and $21,000, respectively, compared to the same periods in the prior year. In addition,

Table of Contents

Professional fees. Professional fees, which include legal, consulting, audit and ~~professional~~tax fees, for the three and six months ended June 30, ~~2020 decreased $134,000,~~2021 increased $65,000, or ~~32.1%~~24.3%, and ~~decreased $187,000,~~$140,000, or ~~21.7%~~21.8%, compared to the same periods in the prior year. The ~~decreases~~increases were the result of ~~decreases~~increases of $56,000 and $60,000, and $89,000 and $35,000 in our banking and HoldCo segments, respectively, for the three and six months ended June 30, 2021, respectively. The increases were the result of legal and ~~audit~~professional fees related to attempts to recover amounts on liquidated loans in the Bank’s SBA division, and to the acquisition of ~~Nolan during~~a factoring company which was completed on July 1, 2021. Please see Note 17. Subsequent Events within our financial statements elsewhere within this Form 10-Q for more information on this acquisition. These increases were partially offset by decreases in audit and tax consulting fees in these segments of $25,000 and $53,000 for the three and six months ended ~~March 31, 2019,~~June 30, 2021, respectively. Professional fees in our other financial services segment decreased $28,000 and increased $68,000 for the ~~preparation of our Registration Statement filed~~three and six months ended June 30, 2021. The decrease for the three month period was primarily due to a decrease in ~~April 2019~~consulting fees related to our ~~initial public offering,~~participant directed plan services team, and ~~decreases in expenses~~the increase for the six month period related to ~~legal and regulatory matters at Sanders Morris. These decreases were slightly offset by increases~~an increase in ~~legal and~~ professional fees in our Nolan division related to an agreement with the former owner of Nolan under which payments increased by $44,000 due to an increase in the earnings from our Nolan division over the same period in the prior year, and an increase in tax consulting expense related to the completion of the tax returns for ~~our annual audit~~the trust department’s pooled funds earlier in the year compared to the prior period of $9,000, and ~~periodic SEC filings.~~other individually immaterial increases.

Data processing. Data processing includes costs related to the Company’s operating systems. Data processing expense for three and six months ended June 30, ~~2020 decreased $18,000,~~2021 increased $72,000, or ~~8.2%~~37.1%, and ~~decreased $48,000,~~$85,000, or ~~10.7%~~22.1%, ~~respectively,~~ compared to the same periods in the prior year. The ~~decreases~~increases were the result of increases of $53,000 and $19,000, and $53,000 and $32,000 in our banking and other financial services segments, respectively, for the three and six months ended June 30, 2021, respectively. The $53,000 increase in our banking segment was due to ~~lower~~costs related to the conversion of the Bank’s core accounting system. The increases in our other financial services segment were primarily related to increased trust data processing ~~for~~fees, and discounts received ~~for~~during the three and six months ended June 30, 2020, ~~and decreases in data processing and operating systems at Sanders Morris and Tectonic Advisors related to the completion of initiatives undertaken during 2018 and early 2019.~~which decreased expense for those earlier periods.

Other. Other expenses include costs for insurance, Federal Deposit Insurance Corporation (“FDIC”) and Office of the Comptroller of the Currency (“OCC”) assessments, director fees, regulatory filing fees related to our brokerage business, business travel, management fees, and other operational expenses. Other expenses for three and six months ended June 30, ~~2020 decreased $68,000,~~2021 increased $173,000, or ~~10.0%~~26.2%, and ~~decreased $36,000,~~170,000, or ~~2.8%~~11.8%, compared to the same periods in the prior year. ~~Decreases in these costs were~~The increase was primarily related to ~~decreases~~increases in ~~management fees to third parties, which are~~computer software costs in our banking and other financial services segments totaling $160,000 and $196,000, related to technology initiatives across the change in the manner in which our chief executive officer was paid as discussed above within salaries and employee benefits, and decreases in travel, meals, and entertainment costs related to decreased brokerage and private placement activity. These decreases were somewhat offset by increasesCompany. We also experienced an increase in our directors’ and officers’ insurance coverage of $11,000 and $30,000 for the three and six months ended June 30, 2021, respectively. Other increases which were individually immaterial included employee recruitment costs, ~~as a result of our status as a public filing entity, increases in internet costs related to increasing bandwidth to accommodate network changes~~directors fees, and office expenses at Sanders ~~Morris~~Morris. These increases were partially offset by a decrease in payroll processing fees of $13,000 and ~~Tectonic Advisors,~~$24,000 for the three and ~~increases~~six months ended June 30, 2021, respectively, and a decrease in ~~compliance~~travel expense for the six month period ended June 30, 2021 of $32,000, and ~~advertising costs at Sanders Morris.~~other individually immaterial decreases.

Income Taxes

~~The income~~Income tax expense for the three and six months ended June 30, ~~2020~~2021 was $1.1 million and $2.3 million, respectively, compared to $587,000 and $1.3 million respectively, compared to $407,000 and $771,000 for the three and six months ended June 30, 2019. The effective income tax rate was 21.7% and 22.3% for the three and six months ended June 30, 2020, respectively compared to 15.7% and 15.0% for the same periods in the prior year. The effective income tax rate ~~differed from the U.S. statutory rate of 21%~~was 22.4% and 21.2% for the three and six months ended June 30, ~~2019, primarily due~~2021, respectively, compared to ~~Tectonic Advisors~~21.7% and ~~Sanders Morris’ tax status as partnerships~~22.3% for the same periods in the prior ~~to May 13, 2019, the date the Tectonic Merger was completed.~~year.

Segment Reporting

We have three operating segments: Banking, Other Financial Services and HoldCo. Our primary operating segments are Banking and Other Financial Services.

Our Banking operating segment includes both commercial and consumer banking services. Commercial banking services are provided primarily to small to medium-sized businesses and their employees, which includes a wide array of lending and cash management products. Consumer banking services include lending and depository services.

~~Table of Contents~~

Our Other Financial Services segment includes Tectonic Advisors, Sanders Morris, the Bank’s Trust Division, which includes a TPA services unit, and HWG. Through these business divisions, we offer investment advisory and brokerage services to individuals and businesses, private trust services, and financial management services, including personal wealth management, retirement plan design and administrative services, and insurance brokerage services.

Table of Contents

A third operating segment, HoldCo, includes the Bank’s immediate parent and related subordinated debt, as well as operations of the financial holding company that serves as parent for the group overall. Our principal source of revenue is dividends from our subsidiaries.

The following table presents key metrics related to our segments:

Three Months Ended June 30, 2020

Six Months Ended June 30, 2020

(In thousands)

Banking

Other Financial Services

HoldCo

Consolidated

Banking

Other Financial Services

HoldCo

Consolidated

Revenue(1)
$ 3,672 $ 6,363 $ (196
)
$ 9,839 $ 7,970 $ 14,002 $ (415
)
$ 21,557
Income (loss) before taxes
$ 1,736 $ 1,395 $ (430
)
$ 2,701 $ 3,121 $ 3,576 $ (889
)
$ 5,808

	Three Months Ended June 30, 2021									Six Months Ended June 30, 2021
(In thousands)	Banking		Other Financial Services		HoldCo			Consolidated		Banking		Other Financial Services		HoldCo			Consolidated
Revenue(1)	$	5,822	$	8,025	$	(219	)	$	13,628	$	11,588	$	17,072	$	(352	)	$	28,308
Income (loss) before taxes	$	2,981	$	2,361	$	(555	)	$	4,787	$	6,093	$	5,290	$	(1,038	)	$	10,345

Three Months Ended June 30, 2019

Six Months Ended June 30, 2019

(In thousands)

Banking

Other Financial Services

HoldCo

Consolidated

Banking

Other Financial Services

HoldCo

Consolidated

Revenue(1)
$ 3,296 $ 7,696 $ (221
)
$ 10,771 $ 6,208 $ 14,851 $ (451
)
$ 20,608
Income (loss) before taxes
$ 982 $ 2,045 $ (428
)
$ 2,599 $ 1,810 $ 4,138 $ (791
)
$ 5,157

	Three Months Ended June 30, 2020									Six Months Ended June 30, 2020
(In thousands)	Banking		Other Financial Services		HoldCo			Consolidated		Banking		Other Financial Services		HoldCo			Consolidated
Revenue(1)	$	3,672	$	6,363	$	(196	)	$	9,839	$	7,970	$	14,002	$	(415	)	$	21,557
Income (Loss ) Before Taxes	$	1,736	$	1,395	$	(430	)	$	2,701	$	3,121	$	3,576	$	(889	)	$	5,808

(1)

Net interest income plus non-interest income

Banking

Income before taxes for the three and six months ended June 30, ~~2020~~2021 increased ~~$754,000,~~$1.2 million, or ~~76.8%~~71.7%, and ~~increased $1.3~~$3.0 million, or ~~72.4%~~95.2%, respectively, compared to the same periods in the prior year. The increase during the three months ended June 30, ~~2020~~2021 was primarily the result of a ~~$259,000~~$2.1 million increase in net interest income, a ~~$117,000 increase in non-interest income and a $454,000~~$334,000 decrease ~~in non-interest expense, partly offset by a $75,000 increase~~ in the provision for loan ~~losses.~~losses and $84,000 increase in non-interest income, partly offset by a $1.2 million increase in non-interest expense. The increase during the six months ended June 30, ~~2020~~2021 was primarily the result of a ~~$1.2~~$3.8 million increase in net interest income and a ~~$582,000 increase~~$694,000 decrease in the provision for loan losses, partly offset by a $194,000 decrease in non-interest income and a ~~$329,000 decrease~~$1.3 million increase in non-interest ~~expense, partly offset by a $780,000 increase in the provision for loan losses.~~expense.

Net interest income for the three and six months ended June 30, ~~2020~~2021 increased ~~$259,000,~~$2.1 million, or ~~8.0%~~59.4%, and ~~$1.2~~$3.8 million, or ~~19.2%~~52.1%, respectively, compared to the same periods in the prior year, due primarily to PPP-related SBA fees of $1.2 million and $2.9 million recognized for the three and six months ended June 30, 2021, respectively. Other changes included an increase in the average volume of loans and a decrease in average rates paid on interest-bearing deposits and borrowings, partly offset by a decrease in average yields on earning assets and increase in average volume of interest-bearing deposits and borrowings. See the analysis of net interest income included in the section captioned “Net Interest Income” included elsewhere in this discussion.

The provision for loan losses for the three and six months ended June 30, ~~2020,~~2021, totaled $141,000 and $569,000, respectively, compared to $475,000 and $1.3 million ~~respectively, compared to $400,000 and $483,000~~ for the ~~three and six months ended June 30, 2019, respectively.~~same periods in the prior year. See “Allowance for Loan Losses” included elsewhere in this discussion.

Non-interest income for the three months ended June 30, 2021 increased $84,000, or 44.0%, compared to the same period in the prior year. The increase was primarily due to a $101,000 increase in gain on sale of loans resulting from the Company having no loan sales during the three months ended June 30, 2020, ~~increased $117,000, or 158.1%,~~a $31,000 increase in rental income and ~~$582,000, or 819.7%~~a $7,000 increase in deposit service income, partly offset by a $56,000 decrease in net loan servicing income. Non-interest income for the six months ended June 30, ~~2020,~~2021 decreased $194,000, or 29.7% compared to the same ~~periods~~period in the prior year, ~~respectively. The increases were~~ primarily due to a ~~$141,000~~$331,000 decrease in gain on sale of loans, partly offset by a $97,000 increase in net loan servicing income (which was the result of a $226,000 decrease in servicing rights amortization, partly offset by a ~~$24,000~~$100,000 decrease in the servicing asset valuation allowance and a $29,000 decrease in servicing fees), a $28,000 increase in rental income ~~for the three months ended June 30, 2020,~~ and a ~~$432,000~~$11,000 increase in ~~gain on sale of assets and a $165,000 increase in net loan servicing income, partly offset by a $15,000 decrease in rental~~deposit service income. ~~The increase in net loan servicing income was the result of reversing the allowance valuation allowance for loan servicing assets during the three months ended June 30, 2020.~~ See the analysis of non-interest income included in the section captioned “Non-Interest Income” included elsewhere in this discussion.

~~Table of Contents~~

Non-interest expense for the three ~~months ended June 30, 2020 decreased $454,000, or 23.7%,~~ and ~~decreased $329,000, or 8.4% for the~~ six months ended June 30, ~~2020~~2021 increased $1.2 million, or 84.8%, and $1.3 million, or 13.0%, respectively, compared to the same periods in the prior ~~year, respectively.~~year. The ~~decreases were primarily due to a $408,000 decrease in~~increases for the three and six months ended June 30, 2021 included salaries and employee benefits ~~resulting from recording a portion~~ of ~~fees received from the SBA to offset employee costs to originate PPP loans, partly offset by~~$1.1 million and $1.3 million, respectively, for annual merit increases and ~~increase~~increases in staff and ~~also to~~incentive bonuses, professional fees of $62,000 and $56,000, respectively, data processing of $53,000 for both periods, and various other expenses of $99,000 and $56,000, respectively. The increase was partly offset by a $68,000 and $76,000 decrease in ~~professional fees related~~occupancy and equipment expense for the three and six months ended June 30, 2021, respectively, compared to the ~~acquisition of~~same periods in the ~~Nolan business and other new business activity during the three months ended March 31, 2019.~~prior year. See the analysis of non-interest expense included in the section captioned “Non-Interest Expense” included elsewhere in this discussion.

Table of Contents

Other Financial Services

Income before taxes for the three and six months ended June 30, ~~2020 decreased $650,000,~~2021 increased $966,000, or ~~31.8%~~69.2%, and ~~decreased $562,000,~~increased $1.7 million, or ~~13.6%~~48.0%, respectively, compared to the same periods in the prior year. The ~~decreases~~increase during the three and six months ended June 30, ~~2020 were~~2021 was primarily the result of ~~decreases~~an increase of ~~$1.3~~$1.7 million and ~~$850,000~~$3.1 million in non-interest income for the three and six months ended June 30, 2021, respectively, offset by ~~decreases~~an increase of ~~$682,000~~$696,000 and ~~$288,000~~$1.4 million, respectively, in non-interest expense.

Non-interest income for the three and six months ended June 30, ~~2020 decreased $1.3~~2021 increased $1.7 million, or ~~17.3%~~26.1%, and ~~decreased $850,000,~~$3.1 million, or ~~5.7%~~21.9%, compared to the same ~~periods~~period in the prior ~~year, respectively.~~year. The ~~decreases were~~increase was primarily due to increases in advisory and trust income totaling $1.3 million and $2.0 million for the three and six months ended June 30, 2021, respectively, related primarily to a ~~decrease~~recovery in the value of our assets under management at Tectonic Advisors and Sanders Morris, as well as to net asset inflows to our platforms, and increases in brokerage income of ~~$1.1 million~~$105,000 and $499,000 for the three and six month periods related to a ~~decrease~~recovery in ~~advisory income of $155,000~~private placement and syndicated offering activity at Sanders Morris, particularly during the first quarter 2021, as well as increases in commission based trading activity, and in services fees related to the Nolan division of $203,000 and $662,000 for the three ~~months ended June 30, 2020. These decreases were offset by~~and six month periods, respectively, due to an increase in ~~advisory income~~the work completed and billed by Nolan related to earlier timing of ~~$292,000~~that work, particularly during the ~~three months ended March 31, 2020, related to increases in assets under management at Sanders Morris and Tectonic Advisors experience during the period,~~first quarter 2021, and an increase in services fees and other income of $86,000, related to an increase in other income related to a non-recurring extinguishment of a retirement liability during the three months ended March 31, 2020 and bad debt expense recognized during the three months ended March 31, 2019.Nolan’s clients overall. See also the analysis of non-interest income included in the section captioned “Non-Interest Income” included elsewhere in this discussion.

Non-interest expense for the three and six months ended June 30, ~~2020 decreased $682,000,~~2021 increased $696,000, or ~~12.1%~~14.0%, and ~~decreased $288,000,~~$1.4 million, or ~~2.7%~~13.0%, ~~respectively,~~ compared to the same periods in the prior year. These ~~decreases~~increases were related to ~~decreases~~increases in salaries and employee benefits of ~~$496,000~~$600,000 and ~~$155,000 for the three and six months ended June 30, 2020, respectively,~~$1.2 million, primarily related to ~~decreases~~increases in brokerage activity, including private placement activity, at Sanders Morris leading to ~~decreased~~an increase in commissions and earnouts totaling $409,000 and ~~incentive bonuses~~$692,000 for the three and six months ended June 30, 2021, respectively, compared to the same periods in the prior year, ~~partially offset by~~and staffing additions at Nolan during late 2020 to add capacity for additional plan administration ~~work. In addition, trust expenses~~work totaling $195,000 and $451,000, respectively. Occupancy and equipment expense decreased by $100,000 and $199,000 for the three and six months ended June 30, 2020 decreased by $127,000 and $49,000, respectively, related to decreases in the underlying assets under management on which those fees are based primarily during the three months ended June 30, 2020, and decreases in occupancy and equipment expenses of $76,000 and $73,000 for the three and six months ended June 30, 2020, respectively,2021, related to software that became fully depreciated as of April ~~2020.~~2020 and the utilities and common area maintenance adjustments related to decreases in these costs for our leased office space due to the COVID-19 pandemic’s effect on these costs due to work from home mandates and the effects of social distancing. Trust expense increased $223,000 and $232,000 for the three and six month periods, respectively, related to increases in the value of the assets on which these expenses are based. Professional fees decreased by $27,000 and increased $69,000 for the three and six months ended June 30, 2021. The increase related to an increase in fee expense under our agreement with the former owner of Nolan related to increase in results from that group, which was partially offset by other variances, including decreases in consulting expense related to our participant direction services group due to staffing additions, which reduced reliance on consultants. The remaining variances for the three and six months ended June 30, ~~2020~~2021 related to ~~decreases~~increases in ~~professional fees,~~ data processing and other expenses, ~~offset by increases~~and decreases in brokerage and advisory direct ~~costs, from increases in certain segments of brokerage activity and related exchange and clearing firm service fees, referral fees, and information services expense.~~costs. See also the analysis of non-interest income included in the section captioned “Non-Interest Expense” included elsewhere in this discussion.

HoldCo

Loss before taxes for the three ~~months ended June 30, 2020 increased $2,000, or 0.5%,~~ and ~~increased $98,000, or 12.4% for the~~ six months ended June 30, ~~2020,~~2021 increased $125,000, or 29.1%, and $149,000, or 16.8%, respectively, compared to the same periods in the prior year. The increases in the loss were due to an increase in salaries and benefits expense of $48,000 and $148,000 for the three and six months ended June 20, 2021, respectively, related to an increase in stock compensation expense related to stock grants made in September 2020, partially offset during the three months ended June 30, ~~2020 was due~~2021 by the full amortization of stock options granted previously, and to increases in ~~salaries and compensation expense of $173,000 other expenses of $28,000, partly offset by decreases in interest expense on borrowings of $50,000 and~~ professional fees related to the acquisition of ~~$67,000.~~Integra Funding Solution that was completed on July 1, 2021. See Note 17, Subsequent Events, for more information on this acquisition. In addition, we experienced increases in our advertising and market expense related to branding initiatives undertaken and increases in our officers’ and directors’ liability insurance coverage.

Financial Condition

Investment Securities

The primary purpose of the Company’s investment portfolio is to provide a source of earnings for liquidity management purposes, to provide collateral to pledge against borrowings, and to control interest rate risk. In managing the portfolio, the Company seeks to attain the objectives of safety of principal, liquidity, diversification, and maximized return on investment.

~~Table of Contents~~

As of June 30, ~~2020,~~2021, securities available for sale consisted of U.S. government agency securities and mortgage-backed securities guaranteed by U.S. government agencies. Securities held to maturity consisted of Property Assessed Clean Energy investments. These investment contracts or bonds, located in California and Florida, originate under a contractual obligation between the property owners, the local county administration, and a third-party administrator and sponsor. The assessments are created to fund the purchase and installation of energy saving improvements to the property, such as solar panels. Generally, as a property assessment, the total assessment is repaid in installments over a period ~~of 10~~up to 15 years by the then current property owner(s). Each installment is collected by the County Tax Collector where the property is located. The assessments are an obligation of the property. Each assessment is equal in priority to the other property taxes and assessments associated with the property, including local school, city, and county ad-valorem taxes.

Table of Contents

As of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Bank held ~~FRB~~Federal Reserve Bank of Dallas (“FRB”) stock in the amount of $1.2 ~~million and~~million. The Bank held FHLB stock in the amount of $1.2 million ~~all~~as of ~~which was~~June 30, 2021 and December 31, 2020. The FRB stock and FHLB stock were classified as restricted securities.

Securities not readily marketable consists of an income interest in a private investment.

The following table presents the amortized cost and fair values of the securities portfolio as of the dates indicated:

As of June 30, 2020

As of December 31, 2019

(In thousands)

Amortized
Cost

Estimated
Fair Value

Amortized
Cost

Estimated
Fair Value

Securities available for sale:

U.S. government agencies
$ 10,091 $ 10,157 $ 10,684 $ 10,731
Mortgage-backed securities
2,781 2,873 1,925 1.946
Total securities available for sale
$ 12,872 $ 13,030 $ 12,609 $ 12,677

Securities held to maturity:

Property assessed clean energy
$ 5,827 $ 5,827 $ 6,349 $ 6,349

Securities, restricted:

Other
$ 2,429 $ 2,429 $ 2,417 $ 2,417

Securities not readily marketable
$ 100 $ 100 $ 100 $ 100

	As of June 30, 2021				As of December 31, 2020
(In thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Securities available for sale:
U.S. government agencies	$	16,140	$	15,913	$	14,936	$	14,949
Mortgage-backed securities		1,966		2,020		2,373		2,447
Total securities available for sale	$	18,106	$	17,933	$	17,309	$	17,396

Securities held to maturity:
Property assessed clean energy	$	2,784	$	2,784	$	5,776	$	5,776

Securities, restricted:
Other	$	2,431	$	2,431	$	2,431	$	2,431

Securities not readily marketable	$	100	$	100	$	100	$	100

The following table summarizes the maturity distribution schedule with corresponding weighted-average yields of securities available for sale and securities held to maturity as of June 30, ~~2020.~~2021. Yields are calculated based on amortized cost. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Other securities classified as restricted include stock in the FRB and the FHLB, which have no maturity date. These securities have been included in the total column only and are not included in the total yield.

Maturing

After One Year After Five Years

One Year

Through

Through

After

or Less

Five Years

Ten Years

Ten Years

Total

(In thousands, except percentages)

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Securities available for sale:

U.S. government agencies
$ - -
%
$ 1,799 2.01
%
$ 7,000 1.62
%
$ 1,292 1.85
%
$ 10,091 1.72
%
Mortgage-backed securities
- - 195 3.25 931 2.83 1,655 2.30 2,781 2.55
Total
$ - -
%
$ 1,994 2.13
%
$ 7,931 1.77
%
$ 2,947 2.10
%
$ 12,872 1.90
%
Securities held to maturity:

Property assessed clean energy
$ - -
%
$ 556 6.34
%
$ 2,479 5.71
%
$ 2,792 7.32
%
$ 5,827 6.54
%
Securities, restricted:

Other
$ - -
%
$ - -
%
$ - -
%
$ - -
%
$ 2,429 -
%
Securities not readily marketable
$ - -
%
$ - -
%
$ - -
%
$ - -
%
$ 100 -
%

	Maturing
	One Year or Less					After One Year Through Five Years					After Five Years Through Ten Years					After Ten Years					Total
(In thousands, except percentages)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities available for sale:
U.S. government agencies	$	-		-	%	$	1,250		0.89	%	$	11,188		1.03	%	$	3,702		0.83	%	$	16,140		0.97	%
Mortgage-backed securities		-		-			1,029		2.99			-		-			937		1.98			1,966		2.51
Total	$	-		-	%	$	2,279		1.84	%	$	11,188		1.03	%	$	4,639		1.07	%	$	18,106		1.14	%
Securities held to maturity:
Property assessed clean energy	$	-		-	%	$	-		-	%	$	-		-	%	$	2,784		7.32	%	$	2,784		7.32	%
Securities, restricted:
Other	$	-		-	%	$	-		-	%	$	-		-	%	$	-		-	%	$	2,431		-	%
Securities not readily marketable	$	-		-	%	$	-		-	%	$	-		-	%	$	-		-	%	$	100		-	%

Table of Contents

Loan Portfolio Composition

Total loans excluding allowance for loan losses, increased ~~$103.7~~$10.3 million, or ~~35.6%~~2.6%, to ~~$394.8~~$410.8 million at June 30, ~~2020,~~2021, compared to ~~$291.1~~$400.5 million at December 31, ~~2019. The increase includes PPP loans totaling $98.3 million.~~2020. SBA loans comprise the largest group of loans in our portfolio totaling ~~$236.7~~$259.1 million, or ~~60.0%~~63.1% (53.3% excluding PPP loans) of the total loans at June 30, ~~2020,~~2021, compared to ~~$139.7~~$252.4 million, or ~~48.0%~~63.0% (53.4% excluding PPP loans) at December 31, ~~2019.~~2020. Commercial and industrial loans totaled ~~$86.3~~$81.4 million, or ~~21.9% of the total loans at June 30, 2020, compared to $85.5 million, or 29.4%, at December 31, 2019. Commercial and construction real estate loans totaled $60.2 million, or 15.3%~~19.8% (25.1% excluding PPP loans), of the total loans at June 30, ~~2020,~~2021, compared to ~~$54.8~~$79.9 million, or ~~18.8%~~19.9% (25.1% excluding PPP loans), at December 31, ~~2019.~~2020. Commercial and construction real estate loans totaled $60.3 million, or 14.7% (18.6% excluding PPP loans), of the total loans at June 30, 2021, compared to $52.9 million, or 13.2% (16.6% excluding PPP loans), at December 31, 2020.

The following table sets forth the composition of our loans held for investment:

(In thousands, except percentages)

June 30, 2020

December 31, 2019

Commercial and industrial
$ 86,311 21.9
%
$ 85,476 29.4
%
Consumer installment
5,717 1.4 3,409 1.2
Real estate – residential
4,999 1.3 5,232 1.8
Real estate – commercial
50,082 12.7 46,981 16.1
Real estate – construction and land
10,160 2.6 7,865 2.7
SBA 7(a) guaranteed
165,476 41.9 69,963 24.0
SBA 7(a) unguaranteed
46,778 11.8 47,132 16.2
SBA 504
24,446 6.2 22,591 7.8
USDA
799 0.2 2,430 0.8
Other
1 - - -
Total Loans
$ 394,769 100.0
%
$ 291,079 100.0
%

(In thousands, except percentages)	June 30, 2021				December 31, 2020
Commercial and industrial	$	81,446	19.8	%	$	79,864	19.9	%
Consumer installment		3,773	0.9			10,259	2.6
Real estate – residential		5,336	1.3			4,319	1.1
Real estate – commercial		52,826	12.9			44,484	11.1
Real estate – construction and land		7,498	1.8			8,396	2.1
SBA 7(a) guaranteed		173,922	42.3			164,687	41.1
SBA 7(a) unguaranteed		50,355	12.3			52,179	13.0
SBA 504		34,852	8.5			35,553	8.9
USDA		803	0.2			801	0.2
Other		-	-			-	-
Total Loans	$	410,811	100.0	%	$	400,542	100.0	%

At origination, the Company determines whether holding the guaranteed portion of SBA 7(a) and USDA loans provide better long-term risk adjusted returns than selling the loans, and records as either held for investment or held for sale. The Company records held for sale loans at the lower of cost or fair value. Loans held for sale totaled ~~$11.6~~$21.1 million and ~~$9.9~~$14.9 million at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. ~~During~~For the three and six months ended June 30, ~~2020,~~2021, the Company elected to reclassify ~~$5.8~~$6.2 million and ~~$7.5~~$15.1 million, respectively, of the SBA 7(a) loans held for sale to held for investment.

Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. As of June 30, ~~2020,~~2021, our loan portfolio included ~~$72.4~~$70.7 million of loans, approximately ~~18.3%~~17.2% of our total funded loans ~~(24.4% of total funded loans, net of the~~(21.8% excluding PPP loans), to the dental industry, compared to ~~$69.2~~$67.2 million, or ~~23.8%~~16.8% (21.1% excluding PPP loans), of total funded loans, as of December 31, ~~2019.~~2020. We believe that these loans are to credit worthy borrowers and are diversified geographically.

Paycheck Protection Program

In April 2020, we began originating loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The remaining loan balance after forgiveness of any amounts is still fully guaranteed by the SBA. Terms of the PPP loans include the following (i) maximum amount limited to the lesser of $10 million or an amount calculated using a payroll-based formula, (ii) maximum loan term of two or five years, depending on the date of origination, (iii) interest rate of 1.00%, (iv) no collateral or personal guarantees are required, (v) no payments are required for six months following the loan disbursement date and (vi) loan forgiveness up to the full principal amount of the loan and any accrued interest, subject to certain requirements including that no more than 40% of the loan forgiveness amount may be attributable to non-payroll costs. In return for processing and booking the loan, the SBA will pay the lender a processing fee tiered by the size of the loan (5% for loans of not more than $350 thousand; 3% for loans more than $350 thousand and less than $2 million; and 1% for loans of at least $2 million). During the ~~three~~year ended December 31, 2020, we funded $98.3 million of PPP loans. As of June 30, 2021, approximately $75.6 million of the PPP loans originated in 2020 have been forgiven by the SBA and were paid off or repaid by the borrower, leaving an outstanding balance of $22.7 million as of June 30, 2021. The Consolidated Appropriations Act, 2021, which was signed into law on December 27, 2020, allocated an additional $284 billion to the SBA to fund a second round of PPP and extended the application period for the PPP to March 31, 2021. The PPP application period was later extended to the earlier of May 31, 2021, or such date when all PPP funds are exhausted. During the six months ended June 30, ~~2020,~~2021, we originated ~~$98.3~~$66.2 million of PPP ~~loans, and received $4.4~~loans. As of June 30, 2021, approximately $2.6 million of ~~related~~the PPP loans originated in 2021 have been forgiven by the SBA and were paid off or repaid by the borrower, leaving an outstanding balance of $63.6 million as of June 30, 2021. Total outstanding PPP loans was $86.3 at June 30, 2021. We received $3.4 million of PPP-related fees from the ~~SBA.~~SBA for the loans originated during 2021. We deferred ~~$3.4~~$3.3 million of the PPP-related SBA fees, net of ~~$966,000~~$99,000 which represented costs incurred to originate these PPP loans.

Table of Contents

We are also participating in the PPPLF which, through ~~September~~June 30, ~~2020, will extend~~2021, extended loans to banks who are loaning money to small businesses under the PPP. The total amount borrowed under the PPPLF as of June 30, ~~2020~~2021 was ~~$33.9~~$87.6 million and is non-recourse and secured by an equal amount of the PPP loans we originated. The maturity date of a borrowing under the PPPLF is equal to the maturity date of the PPP loan pledged to secure the borrowing and would be accelerated (i) if the underlying PPP loan goes into default and is sold to the SBA to realize on the SBA guarantee or (ii) to the extent that any loan forgiveness reimbursement is received from the SBA. Borrowings under the PPPLF will bear interest at a rate of 0.35%. ~~In addition, we may exclude all PPP loans pledged as collateral to the PPP Facility from our average total consolidated assets for the purposes of calculating our leverage ratio.~~

~~Table of Contents~~

As of June 30, ~~2020, 33.2%~~2021, 46.4% of the Company’s loan portfolio, or ~~$130.9~~$190.7 million, ~~matured~~matures or ~~re-priced~~re-prices within one year or less. The following table presents the contractual maturity ranges for the Company’s loan portfolio as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, and also presents for each maturity range the portion of loans that have fixed interest rates or variable interest rates over the life of the loan in accordance with changes in the interest rate environment as represented by the base rate:

As of June 30, 2020

Over 1 Year through 5 Years

Over 5 Years

(In thousands)

One Year or
Less

Fixed Rate

Floating or
Adjustable
Rate

Fixed Rate

Floating or
Adjustable
Rate

Total

Commercial and industrial

$
11,362

$
9,297

$
9,223

$
55,889

$
540

$
86,311

Consumer installment

3,505

2,212

-

-

-

5,717

Real estate – residential

1,348

3,651

-

-

-

4,999

Real estate – commercial

7,204

12,234

21,813

2,295

6,536

50,082

Real estate – construction and land

4,513

98

4,189

1,360

-

10,160

SBA 7(a) guaranteed

54,587

94,964

15,171

754

-

165,476

SBA 7(a) unguaranteed

40,618

34

5,638

488

-

46,778

SBA 504

6,975

-

16,403

-

1,068

24,446

USDA

799

-

-

-

-

799

Other

1

-

-

-

-

1

Total

$
130,912

$
122,490

$
72,437

$
60,786

$
8,144

$
394,769

	As of June 30, 2021
			Over 1 Year through 5 Years				Over 5 Years
(In thousands)	One Year or Less		Fixed Rate		Floating or Adjustable Rate		Fixed Rate		Floating or Adjustable Rate		Total
Commercial and industrial	$	9,779	$	11,649	$	5,440	$	54,578	$	-	$	81,446
Consumer installment		907		2,854		-		12		-		3,773
Real estate – residential		108		5,228		-		-		-		5,336
Real estate – commercial		10,823		7,734		24,763		1,580		7,926		52,826
Real estate – construction and land		4,929		1,963		-		412		194		7,498
SBA 7(a) guaranteed		99,386		62,769		11,308		459		-		173,922
SBA 7(a) unguaranteed		45,195		366		3,893		901		-		50,355
SBA 504		18,720		-		12,408		-		3,724		34,852
USDA		803		-		-		-		-		803
Other		-		-		-		-		-		-
Total	$	190,650	$	92,563	$	57,812	$	57,942	$	11,844	$	410,811

As of December 31, 2019

Over 1 Year through 5 Years

Over 5 Years

(In thousands)

One Year or
Less

Fixed Rate

Floating or
Adjustable
Rate

Fixed Rate

Floating or
Adjustable
Rate

Total

Commercial and industrial

$
15,117

$
7,060

$
8,880

$
54,419

$
-

$
85,476

Consumer installment

3,070

339

-

-

-

3,409

Real estate – residential

1,258

3,974

-

-

-

5,232

Real estate – commercial

4,602

12,974

21,287

1,998

6,120

46,981

Real estate – construction and land

4,121

99

3,645

-

-

7,865

SBA 7(a) guaranteed

59,065

115

10,004

779

-

69,963

SBA 7(a) unguaranteed

42,094

38

4,498

502

-

47,132

SBA 504

8,456

-

11,747

-

2,388

22,591

USDA

2,430

-

-

-

-

2,430

Other

-

-

-

-

-

-

Total

$
140,213

$
24,599

$
60,061

$
57,698

$
8,508

$
291,079

	As of December 31, 2020
			Over 1 Year through 5 Years				Over 5 Years
(In thousands)	One Year or Less		Fixed Rate		Floating or Adjustable Rate		Fixed Rate		Floating or Adjustable Rate		Total
Commercial and industrial	$	11,330	$	9,631	$	6,937	$	51,391	$	575	$	79,864
Consumer installment		6,015		4,231		-		13		-		10,259
Real estate – residential		768		3,551		-		-		-		4,319
Real estate – commercial		3,410		7,628		23,790		2,130		7,526		44,484
Real estate – construction and land		1,690		2,344		4,159		20		183		8,396
SBA 7(a) guaranteed		69,968		80,951		13,286		482		-		164,687
SBA 7(a) unguaranteed		45,387		29		4,878		1,239		646		52,179
SBA 504		20,513		-		11,274		-		3,766		35,553
USDA		801		-		-		-		-		801
Other		-		-		-		-		-		-
Total	$	159,882	$	108,365	$	64,324	$	55,275	$	12,696	$	400,542

Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is less than their average contractual terms due to prepayments.

Loans acquired in acquisitions are initially recorded at fair value with no carryover of the related allowance for credit losses. The fair value of the loans is determined using market participant assumptions in estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest.

Under the accounting model for acquired loans, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the “accretable yield,” is accreted into interest income over the life of the loans.

Table of Contents

Non-performing Assets

Our primary business segments are ~~banking~~Banking and ~~other financial services,~~Other Financial Services, and as outlined above, the ~~banking~~Banking segment’s primary business is lending. That activity entails potential loan losses, the magnitude of which depends on a variety of economic factors affecting borrowers which are beyond our control. While we have instituted underwriting guidelines and policies and credit review procedures to protect us from avoidable credit losses, some losses will inevitably occur. The COVID-19 pandemic has contributed to an increased risk of delinquencies, defaults and foreclosures. ~~We currently expect that a significant number and amount~~Through the date of ~~our loans may experience ratings downgrades, credit deterioration and potential defaults in many industries.~~this filing, the Company has not experienced any loan charge-offs caused by the economic impact from COVID-19.

Non-performing assets include non-accrual loans, loans 90 days or more past due and still accruing and foreclosed assets. Non-performing assets totaled ~~$1.9~~$3.7 million as of June 30, ~~2020,~~2021, compared to ~~$6.0~~$1.8 million as of December 31, ~~2019.~~2020. As of June 30, ~~2020,~~2021, non-performing assets consisted of SBA non-accrual loans totaling ~~$1.7~~$3.6 million, of which ~~$1.1~~$2.5 million was guaranteed by the SBA, and commercial real estate non-accrual loans totaling ~~$163,000.~~$154,000. As of December 31, ~~2019,~~2020, non-performing assets consisted of SBA non-accrual loans totaling ~~$5.9~~$1.6 million, of which ~~$4.9~~$1.1 million was guaranteed by the SBA, and commercial and industrial non-accrual loans totaling ~~$60,000.~~$158,000. There were no foreclosed assets as of June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Loans are considered past due when principal and interest payments have not been received as of the date such payments are contractually due. Loans are placed on non-accrual status when management has concerns relating to the ability to collect the loan interest and generally when such loans are 90 days or more past due. A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the original loan contract. There were no loans past due 90 days or more and still accruing interest as of June 30, 2021 and December 31, 2020.

Foreclosed assets represent property acquired as the result of borrower defaults on loans. Foreclosed assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure. Write-downs occurring at foreclosure are charged against the allowance for possible loan losses. On an ongoing basis, properties are appraised as required by market indications and applicable regulations. Write-downs are provided for subsequent declines in value and are included in other non-interest expense along with other expenses related to maintaining the properties. There were no foreclosed assets as of June 30, 2021 and December 31, 2020.

The following table sets forth certain information regarding non-performing assets and restructured loans by type, including ratios of such loans to total assets as of the dates indicated:

June 30, 2020

December 31, 2019

(In thousands, except percentages)

Amount

Loan
Category to
Total Assets

Amount

Loan
Category to
Total Assets

Non-accrual loans:

Commercial and industrial
$ - -
%
$ 60 0.02
%
Real estate – commercial
163 0.03 - -
SBA guaranteed
1,118 0.21 4,892 1.34
SBA unguaranteed
575 0.11 1,039 0.28
Total non-accrual loans
1,856 0.35 5,991 1.64
Loans past due 90 days and accruing
- - - -
Foreclosed assets
- - - -
Total non-performing assets
$ 1,856 0.35
%
$ 5,991 1.64
%
Restructured loans on non-accrual
$ - -
%
$ - -
%

	June 30, 2021					December 31, 2020
(In thousands, except percentages)	Amount		Loan Category to Total Assets			Amount		Loan Category to Total Assets
Non-accrual loans:
Real estate – commercial	$	154		0.03	%	$	158		0.03	%
SBA guaranteed		2,471		0.44			1,118		0.22
SBA unguaranteed		1,079		0.19			517		0.10
Total non-accrual loans		3,704		0.66			1,793		0.35
Loans past due 90 days and accruing		-		-			-		-
Foreclosed assets		-		-			-		-
Total non-performing assets	$	3,704		0.66	%	$	1,793		0.35	%
Restructured loans on non-accrual	$	-		-	%	$	-		-	%

Restructured loans are considered “troubled debt restructurings” if, due to the borrower’s financial difficulties, we have granted a concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a troubled debt restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current market rate for new debt with similar risk, or a reduction of the face amount of debt, either forgiveness of principal or accrued interest. As of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, we had no loans considered to be a troubled debt restructuring.

As noted in Note ~~4, "Loans~~3, “Loans and Allowance for Loan Losses,"” Section 4013 of the CARES Act, as amended by the Consolidated Appropriations Act, 2021, provides financial institutions the option to suspend ~~TDR~~troubled debt restructuring accounting under GAAP in certain circumstances and the Company has elected that option. The Company has worked proactively with customers experiencing financial challenges from the COVID-19 pandemic. As of June 30, ~~2020,~~2021, the Company had ~~granted principal and interest payment deferrals related to COVID-19 to 139 borrowers representing approximately $92.8~~two loans totaling $3.2 million ~~of its outstanding loans. As of July 31, 2020, the number of modifications decreased to 12 loans with a total outstanding balance of $13.6 million. All loans remain accruing.~~that were in COVID-19-related deferment.

Table of Contents

Allowance for Loan and Lease Losses

The allowance for loan and lease losses (“ALLL”) is a valuation allowance for credit losses in the loan portfolio. Management has adopted a methodology to properly analyze and determine an adequate loan loss allowance, which includes allowance allocations calculated in accordance with FASB ASC Topic 310, Receivables, and allowance allocations calculated in accordance with FASB ASC Topic 450, Contingencies. The analysis is based on sound, reliable and well documented information and is designed to support an allowance that is adequate to absorb all estimated incurred losses in our loan portfolio.

In estimating the specific and general exposure to loss on impaired loans, we have considered a number of factors, including the borrower’s character, overall financial condition, resources and payment record, the prospects for support from any financially responsible guarantors, and the realizable value of any collateral.

We also consider other internal and external factors when determining the allowance for loan losses, which include, but are not limited to, changes in national and local economic conditions, loan portfolio concentrations, and trends in the loan portfolio. Given the level of economic disruption and uncertainty within the State of Texas and the nation as a whole, arising from the COVID-19 pandemic and volatility, the Company qualitatively adjusted the analysis for the allowance for loan losses for these and other risk factors as discussed in ~~the section captioned “COVID-19 Update” in Part I, Item 2, of this Form 10-Q, and in Part II,~~ Item 1.A. “Risk Factors” of ~~this Form 10-Q and in our 2019~~the 2020 Form 10-K. Based on an analysis performed by management at June 30, ~~2020,~~2021, the allowance for loan losses is believed to be adequate to cover estimated loan losses in the portfolio as of that date based on the loan loss methodology employed by management. However, management’s judgment is based upon a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid. Thus, charge-offs in future periods may exceed the allowance for loan losses or significant additional increases in the allowance for loan losses may be required.

Senior management and the Directors’ Loan Committee review this calculation and the underlying assumptions on a routine basis not less frequently than quarterly.

The allowance for loan losses totaled ~~$2.5~~$3.3 million and ~~$1.4~~$2.9 million, as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. During the ~~three and~~ six months ended June 30, ~~2020,~~2021, the Company had ~~net~~one SBA charge-off of $215,000 and recoveries of $12,000. During the three months ended June 30, 2021, there were no charge-offs and recoveries of ~~$148,000 and $123,000, respectively.~~$8,000.

The table below presents a summary of the Company’s net loan loss experience and provisions to the ALLL for the period indicated:

As of and for the Three Months Ended

As of and for the Six Months Ended

June 30,

June 30,

(In thousands, except percentages)

2020

2019

2020

2019

Average loans outstanding
$ 376,803 $ 259,505 $ 337,100 $ 255,433
Gross loans outstanding at end of period
$ 394,769 $ 254,137 $ 394,769 $ 254,137
Allowance for loan losses at beginning of period
$ 2,221 $ 939 $ 1,408 $ 874
Provision for loan losses
475 400 1,263 483
Charge offs:

Commercial and industrial
- - - -
SBA 7(a)
149 248 160 266
Total charge-offs
149 248 160 266
Recoveries:

Commercial and industrial
- - 33 -
SBA 7(a)
1 16 4 16
Total recoveries
1 16 37 16
Net charge-offs
148 232 123 250
Allowance for loan losses at end of period
$ 2,548 $ 1,107 $ 2,548 $ 1,107
Ratio of allowance to end of period loan
0.65
%
0.44
%
0.65
%
0.44 %
Ratio of net charge-offs to average loans
0.16
%
0.36
%
0.07
%
0.20 %

	As of and for the Three Months Ended						As of and for the Six Months Ended
	June 30						June 30
(In thousands, except percentages)	2021			2020			2021			2020
Average loans outstanding	$	436,020		$	376,803		$	437,395		$	337,100
Gross loans outstanding at end of period	$	410,811		$	394,769		$	410,811		$	394,769
Allowance for loan losses at beginning of period	$	3,158		$	2,221		$	2,941		$	1,408
Provision for loan losses		141			475			569			1,263
Charge offs:
SBA 7(a)		-			149			215			160
Total charge-offs		-			149			215			160
Recoveries:
Commercial and industrial		-			-			-			33
SBA 7(a)		8			1			12			4
Total recoveries		8			1			12			37
Net recoveries (charge-offs)		8			148			(203	)		123
Allowance for loan losses at end of period	$	3,307		$	2,548		$	3,307		$	2,548
Ratio of allowance to end of period loan		0.80	%		0.65	%		0.80	%		0.65	%
Ratio of net charge-offs to average loans		0.01	%		0.16	%		0.00	%		0.07	%

Table of Contents

The following table sets forth the allocation of the allowance as of the date indicated and the percentage of allocated possible loan losses in each category to total gross loans as of the date indicated:

(In thousands, except percentages)

June 30, 2020

December 31, 2019

Allocated:

Amount

Loan
Category to
Gross Loans

Amount

Loan
Category to
Gross Loans

Commercial and industrial
$ 1,099 21.9
%
$ 501 29.4
%
Consumer installment
90 1.4 27 1.2
Real estate – residential
58 1.3 22 1.8
Real estate – commercial
687 12.7 347 16.1
Real estate – construction and land
179 2.6 76 2.7
SBA
435 59.9 435 48.0
USDA
- 0.2 - 0.8
Other
- - - -
Total allowance for loan losses
$ 2,548 100.0
%
$ 1,408 100.0
%

(In thousands, except percentages)	June 30, 2021					December 31, 2020
Allocated:	Amount		Loan Category to Gross Loans			Amount		Loan Category to Gross Loans
Commercial and industrial	$	1,129		19.8	%	$	928		19.9	%
Consumer installment		50		0.9			91		2.6
Real estate – residential		76		1.3			52		1.1
Real estate – commercial		738		12.9			527		11.1
Real estate – construction and land		105		1.8			100		2.1
SBA		1,190		63.1			1,225		63.0
USDA		19		0.2			18		0.2
Total allowance for loan losses	$	3,307		100.0	%	$	2,941		100.0	%

Sources of Funds

General

Deposits, loan and investment security repayments and prepayments, proceeds from the sale of securities, and cash flows generated from operations are the primary sources of our funds for lending, investing, and other general purposes. Loan repayments are generally a relatively stable source of funds, while deposit inflows and outflows tend to fluctuate with prevailing interests rates, markets and economic conditions, and competition.

Deposits

Deposits are attracted principally from our primary geographic market area with the exception of time deposits, which, due to the Company’s attractive rates, are attracted from across the nation. The Company offers a broad selection of deposit products, including demand deposit accounts, NOW accounts, money market accounts, regular savings accounts, term certificates of deposit and retirement savings plans (such as IRAs). Deposit account terms vary, with the primary differences being the minimum balance required, the time period the funds must remain on deposit, and the associated interest rates. Management sets the deposit interest rates periodically based on a review of deposit flows and a survey of rates among competitors and other financial institutions. The Company relies ~~primarily~~ on customer service and long-standing relationships with customers to attract and retain ~~deposits; however,~~deposits, and also on CD listing services. During the second quarter of 2020, we received $40.0 million in brokered deposits through an Insured Cash Sweep One-Way Buy agreement to provide liquidity to fund PPP loan originations. This brokered deposit is included in our money market ~~interest rates and rates offered by competing financial institutions significantly affect the Company’s ability to attract and retain deposits.~~accounts as of June 30, 2021.

Total deposits increased ~~$139.2~~$36.0 million, or ~~49.1%~~10.3%, to ~~$422.8~~$384.0 million as of June 30, ~~2020,~~2021, as compared to ~~$283.6~~$348.0 million as of December 31, ~~2019.~~2020. The following table sets forth our average deposit account balances, the percentage of each type of deposit to total deposits, and average cost of funds for each category of deposits for the periods indicated:

For the six months ended June 30,

2020

2019

(In thousands, except percentages)

Average
Balance

Percent of
Deposits

Average
Rate

Average
Balance

Percent of
Deposits

Average
Rate

Non-interest-bearing deposits
$ 45,034 12.8
%
0.00
%
$ 36,451 14.5
%
0.00
%
Savings and interest-bearing demand
9,646 2.7 0.37 7,335 2.9 0.38
Money market accounts
82,456 23.4 0.72 58,692 23.4 1.49
Time deposits
215,018 61.1 2.01 148,350 59.2 2.58
Total deposits
$ 352,154 100.00
%
1.41
%
$ 250,828 100.00
%
1.88
%

	For the six months ended June 30,
	2021								2020
(In thousands, except percentages)	Average Balance		Percent of Deposits			Average Rate			Average Balance		Percent of Deposits			Average Rate
Non-interest-bearing deposits	$	64,205		17.7	%		0.00	%	$	45,034		12.8	%		0.00	%
Savings and interest-bearing demand		13,740		3.8			0.23			9,646		2.7			0.37
Money market accounts		109,602		30.3			0.36			82,456		23.4			0.72
Time deposits		174,470		48.2			1.20			215,018		61.1			2.01
Total deposits	$	362,017		100.00	%		0.70	%	$	352,154		100.00	%		1.41	%

Table of Contents

Borrowings

As of June 30, 2020 and December 31, 2019, borrowings totaled $45.9 million and $24.0 million, respectively. During the three months ended June 30, 2020, the Company borrowed $33.9 million in connection with the FRB PPPLF program.

The table below presents balances of each of the borrowing facilities as of the dates indicated:

June 30,

December 31,

(In thousands)

2020

2019

Borrowings:

FHLB borrowings
$ - $ 12,000
FRB borrowings (PPPLF)
33,886 -
Subordinated notes
12,000 12,000
$ 45,886 $ 24,000

	June 30,		December 31,
(In thousands)	2021		2020
Borrowings:
FRB borrowings (PPPLF)	$	87,544	$	83,690
Subordinated notes		12,000		12,000
	$	99,544	$	95,690

The Company has a credit line with the FHLB with borrowing capacity of ~~$38.5~~$49.7 million secured by commercial loans. The Company determines its borrowing needs and renews the advances accordingly at varying terms. The Company had no borrowings with FHLB as of June 30, ~~2020. As of~~2021 and December 31, 2019, the Company had an overnight advance of $2.0 million with an interest rate of 1.45% and a $10.0 million six month fixed term advance with an interest rate of 2.18% and maturity date of January 27, 2020. ~~At maturity, the term advance was rolled into the overnight advance and subsequently paid off.~~

The Company also has a credit line with the FRB with borrowing capacity of ~~$30.3~~$25.0 million, which is secured by commercial loans. There were no outstanding borrowings against the FRB line of credit as of June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

In connection with the ~~FRB~~ PPPLF, ~~program, the Company has $98.3~~$87.5 million of PPP loans ~~available~~was pledged to ~~be pledged, of which $33.9 million was pledged~~the Federal Reserve and borrowed as of June 30, ~~2020,~~2021, at an interest rate of 0.35%.

Capital Resources and Regulatory Capital Requirements

Shareholders’ equity increased ~~$3.9~~$6.8 million, or ~~7.6%~~11.3%, to ~~$54.3~~$66.8 million as of June 30, ~~2020,~~2021, from ~~$50.5~~$60.0 million as of December 31, ~~2019.~~2020. The increase included net income of ~~$4.5~~$8.0 million, ~~$71,000~~$204,000 net after-tax ~~increase~~decrease in other comprehensive income related to the market value of the securities available for sale, and ~~$45,000~~$163,000 related to stock compensation expense. Use of capital included ~~$766,000~~$776,000 of dividends paid on the Series B preferred stock and $411,000 of dividends paid on the common stock.

Together with the Bank, the Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s and, accordingly, the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. As of June 30, ~~2020,~~2021, the Company and the Bank met all capital adequacy requirements to which they were subject. As of June 30, ~~2020,~~2021, the Bank qualified as ~~"well capitalized"~~“well capitalized” under the prompt corrective action regulations of Basel III and the OCC.

Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations).

Table of Contents

The following table presents our regulatory capital ratios, as well as those of the Bank, as of the dates indicated:

(In thousands, except percentages)

June 30, 2020

December 31, 2019

Amount

Ratio

Amount

Ratio

Tectonic Financial, Inc.

Tier 1 Capital (to Average Assets)
$ 42,200 9.01
%
$ 38,301 11.20
%
Common Equity Tier 1 (to Risk Weighted Assets)
24,950 9.50 21,051 8.20
Tier 1 Capital (to Risk Weighted Assets)
42,200 16.07 38,301 14.92
Total Capital (to Risk Weighted Assets)
44,748 17.04 39,709 15.47

T Bank, N.A.

Tier 1 Capital (to Average Assets)
$ 42,084 9.09
%
$ 38,541 11.09
%
Common Equity Tier 1 (to Risk Weighted Assets)
42,084 16.17 38,541 15.16
Tier 1 Capital (to Risk Weighted Assets)
42,084 16.17 38,541 15.16
Total Capital (to Risk Weighted Assets)
44,632 17.15 39,949 15.71

(In thousands, except percentages)	June 30, 2021					December 31, 2020
	Amount		Ratio			Amount		Ratio
Tectonic Financial, Inc.
Tier 1 Capital (to Average Assets)	$	55,190		12.43	%	$	48,046		11.66	%
Common Equity Tier 1 (to Risk Weighted Assets)		37,940		13.52			30,796		11.01
Tier 1 Capital (to Risk Weighted Assets)		55,190		19.67			48,046		17.17
Total Capital (to Risk Weighted Assets)		58,497		20.85			50,987		18.22

T Bank, N.A.
Tier 1 Capital (to Average Assets)	$	53,283		12.18	%	$	47,071		11.58	%
Common Equity Tier 1 (to Risk Weighted Assets)		53,283		19.15			47,071		17.17
Tier 1 Capital (to Risk Weighted Assets)		53,283		19.15			47,071		17.17
Total Capital (to Risk Weighted Assets)		56,590		20.34			50,012		18.25

Sanders Morris is regulated by FINRA, which, among other requirements, imposes minimums on its net regulatory capital. As of June 30, ~~2020,~~2021, Sanders Morris is in compliance with its net regulatory capital requirement.

Liquidity

Our liquidity relates to our ability to maintain a steady flow of funds to support our ongoing operating, investing and financing activities. Our board of directors establishes policies and analyzes and manages liquidity to ensure that adequate funds are available to meet normal operating requirements in addition to unexpected customer demands for funds, such as high levels of deposit withdrawals or loan demand, in a timely and cost-effective manner. The most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of a large, stable supply of core deposits and funds. Ultimately, public confidence is generated through profitable operations, sound credit quality and a strong capital position. Liquidity management is viewed from a long-term and a short-term perspective as well as from an asset and liability perspective. We monitor liquidity through a regular review of loan and deposit maturities and forecasts, incorporating this information into a detailed projected cash flow model.

The Bank’s liquidity is monitored by its management, the Asset-Liability Committee and its board of directors who review historical funding requirements, current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments.

The Company’s primary sources of funds are retail, small business, custodial, wholesale commercial deposits, loan repayments, maturity of investment securities, other short-term borrowings, and other funds provided by operations. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and loan prepayments are more influenced by interest rates, general economic conditions, and competition. The Company will maintain investments in liquid assets based upon management’s assessment of (1) the need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets, and (4) objectives of the asset/liability management program.

As of June 30, ~~2020,~~2021 the Company had approximately ~~$75.0~~$74.6 million held in an interest-bearing account at the Federal Reserve. The Company has the ability to borrow funds as members of the FHLB and the FRB. As of June 30, ~~2020,~~2021, the Company’s borrowing capacity with the FHLB was ~~$38.5~~$49.7 million based upon loan collateral pledged to the FHLB, of which none was utilized. In addition, the Company had ~~$12.2~~$17.6 million of unpledged securities that could be pledged to the FHLB as collateral to increase the borrowing capacity. The borrowing capacity with the FRB was ~~$30.3~~$25.0 million, of which none was utilized as of June 30, ~~2020.~~2021. In addition, the Company has approximately ~~$70.6~~$89.8 million of SBA guaranteed loans held for investment that could be sold to investors. ~~In connection with the FRB PPPLF program, the Company has $64.4 million of PPP loans available which can be pledged for additional borrowing capacity.~~

~~Table of Contents~~

Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the accompanying balance sheets. Our exposure to credit loss in the event of non-performance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. We follow the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

Table of Contents

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

As of June 30, ~~2020,~~2021, we had commitments to extend credit and standby letters of credit of approximately ~~$27.3~~$23.2 million and ~~$172,000,~~$207,000, respectively.

Item3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity and Market Risk

As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability management policy provides management with guidelines for effective funds management and we have established a measurement system for monitoring the net interest rate sensitivity position.

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

We manage exposure to interest rates by structuring the balance sheet in the ordinary course of business. We use no off-balance-sheet financial instruments to manage interest rate risk.

Our exposure to interest rate risk is managed by the Bank’s Asset Liability Committee in accordance with policies approved by the Bank’s board of directors. The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, liquidity, business strategies and other factors.

The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. We employ methodologies to manage interest rate risk which include an analysis of relationships between interest-earning assets and interest-bearing liabilities, and an interest rate shock simulation model.

We use interest rate risk simulation models and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

~~Table of Contents~~

On ~~a semi-annual~~at least an annual basis, we run various stress tests to measure the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static model, rates are shocked instantaneously, and ramped rates change over a twelve-month and twenty-four month horizon based upon parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Additionally, we run non-parallel simulation involving analysis of interest income and expense under various changes in the shape of the yield curve.

Table of Contents

The following table summarizes the impact of an instantaneous, sustained simulated change in net interest income over a 12-month horizon as of June 30, ~~2020:~~2021:

Change in Interest Rates (basis points)

% Change in Net Interest Income

+200
18.73
+100
9.38
-100 (5.01
)
-200 (12.74
)

Change in Interest Rates (basis points)	% Change in Net Interest Income
+200		14.25
+100		7.11
-100		(5.35	)
-200		(16.01	)

We have found that, historically, interest rates on deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis, meaning that process by which we measure the gap between interest rate sensitive assets verses interest rate sensitive liabilities. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies.

During the COVID-19 pandemic, the Company has participated in the PPP loan program under the CARES Act. The Company originated $98.3 million of PPP loans during the three months ended June 30, 2020. In addition, total deposits increased by $75.9 million and borrowings increased by $33.9 million for the three months ended June 30, 2020. This has increased the Company’s deposit at the Federal Reserve by $8.8 million from $66.2 million at March 31, 2020 to $75.0 million at June 30, 2020. For the Company’s gap analysis, the PPP loans fell into the 3-12 months and 1-3 year time periods due to maturities and prepayment factors applied to PPP loans. The outflow of PPP funds from the Bank has been partially offset by inflows of non-interest-bearing deposits. This has caused an uneven shift in the sensitivity of the repricing gap between short-term assets and liabilities. Although PPP loans have maturities of two years, a large percentage of these loans are anticipated to receive SBA forgiveness and be repaid in advance of stated maturities. The Company believes the repricing gap would have been more in line with historical experiences had it not been for the funding of the PPP loans. The Company feels that funding these loans was both beneficial and necessary for our customers in light of the current economic environment and believes the one-year repricing gap increase is temporary in nature.

Impact of Inflation

Our consolidated financial statements and related notes included elsewhere in this prospectus have been prepared in accordance with GAAP. These require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession. Inflation generally increases the costs of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect on the performance of a financial institution than the effects of general levels of inflation. In addition, inflation affects a financial institution’s cost of goods and services purchased, the cost of salaries and benefits, occupancy expense and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings and shareholders’ equity.

~~Table of Contents~~

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10-Q, an evaluation was performed by the Company, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective at the end of the period covered by this Form 10-Q.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, ~~2020~~2021 that has materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

We are involved, from time to time, as plaintiff or defendant in various legal actions arising in the normal course of its business. Based on the information presently available, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business’s financial condition or results of operations of the Company on a consolidated basis.

~~The following represents a~~There have been no material ~~change~~changes in the Company’s risk factors from those disclosed in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2019. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Form 10-Q constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

The COVID-19 pandemic is adversely affecting the Company and its customers, counterparties, employees, and third-party service providers, and the continued adverse impacts on its business, financial position, results of operations, and prospects could be significant.

The spread of COVID-19 has created a global public-health crisis that has resulted in widespread volatility and deteriorations in household, business, economic, and market conditions. The extent of the impact of the COVID-19 pandemic on the Company’s capital, liquidity, and other financial positions and on its business, results of operations, and prospects will depend on a number of evolving factors, including:

We are unable to estimate the impact of COVID-19 on the Company’s business and operations at this time. The COVID-19 pandemic could cause the Company to experience higher credit losses in our lending portfolio, impairment of our goodwill and other financial assets, further reduced demand for its products and services, and other negative impacts on its financial position, results of operations, and prospects. Sustained adverse effects of the COVID-19 pandemic may also prevent the Company from satisfying our minimum regulatory capital ratios and other supervisory requirements, failing to be able to sustain the paying of dividends to its shareholders, or result in downgrades in its credit ratings.

~~The increased reliance on technology by the Company, its employees and third party vendors during the COVID-19 pandemic may adversely affect its operations.~~

Current and future restrictions on the Company’s workforce’s access to its facilities could limit its ability to meet customer servicing expectations and have a material adverse effect on its operations. The Company relies on business processes and branch activity that largely depend on people, technology, and the use of complex systems and models to manage its business, including access to information technology systems and models as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, the Company has modified its business practices and granted access to its employees to work remotely from their homes in order to have the Company’s operations uninterrupted as much as possible. Further, technology in employees’ homes may not be as robust as in the Company’s offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in its offices, the continuation of these work-from-home measures introduces additional operational risk, especially including increased cybersecurity risk. These cyber risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptionsdisclosed under Item 1A., “Risk Factors,” of the Company’s information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, great risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of its ability to perform critical functions, including wiring funds, all of which could expose the Company to risks of data or financial loss, litigation and liability and could seriously disrupt its operations and the operations of any impacted customers.

Moreover, the Company relies on many third parties in its business operations, including the appraiser of the real property collateral, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses. In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services. For example, loan origination could be delayed due to the limited availability of real estate appraisers for the collateral. Loan closings could be delayed related to reductions in available staff in recording offices or the closing of courthouses in certain counties, which slows the process for title work, mortgage and Uniform Commercial Code filings in those counties. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect the Company’s operations.

Changes in market interest rates or capital markets, including volatility resulting from the COVID-19 pandemic, could affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital or liquidity.

~~The COVID-19 pandemic has significantly affected the financial markets and has resulted in a number of Federal Reserve actions. Market interest rates have declined significantly. On March 3,~~ 2020 the 10-year Treasury yield fell below 1.00% for the first time, and the Federal Reserve reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%. On March 15, 2020, the Federal Reserve further reduced the target federal funds rate by 100 basis points to 0.00% to 0.25% and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic. The Federal Reserve reduced the interest that it pays on excess reserves from 1.60% to 1.10% on March 3, 2020, and then to 0.10% on March 15, 2020. We expect that these reductions in interest rates, especially if prolonged, could adversely affect our net interest income and margins and our profitability.Form 10-K.

Given our business mix, and the fact that most of our assets and liabilities are financial in nature, we tend to be sensitive to market interest rate movements and the performance of the financial markets. Our primary source of income is net interest income, which is the difference between the interest income generated by our interest-earning assets (consisting primarily of loans and, to a lesser extent, securities) and the interest expense generated by our interest-bearing liabilities. Prevailing economic conditions, fiscal and monetary policies and the policies of various regulatory agencies all affect market rates of interest and the availability and cost of credit, which, in turn, significantly affect financial institutions’ net interest income. If the interest we pay on deposits and other borrowings increases at a faster rate than increases in the interest we receive on loans and investments, net interest income, and, therefore, our earnings, could be affected. Earnings could also be affected if the interest we receive on loans and other investments falls more quickly than the interest we pay on deposits and other borrowings.

~~In addition to the general impact of the economy, changes in interest rates or in valuations in the debt or equity markets could directly impact us in one or more of the following ways:~~

~~• the yield on earning assets and rates paid on interest bearing liabilities may change in disproportionate ways;~~

~~• the value of certain balance sheet and off-balance sheet financial instruments or the value of equity investments that we hold could decline;~~

~~• the value of assets for which we provide processing services could decline;~~

~~• the demand for loans and refinancings may decline, which could negatively impact income related to loan originations; or~~

~~• to the extent we access capital markets to raise funds to support our business, such changes could affect the cost of such funds or the ability to raise such funds.~~

Declining values of real estate, increases in unemployment, and the related effects on local economies, including impacts related to the COVID-19 pandemic, may increase our credit losses, which would negatively affect our financial results.

We offer a variety of secured loans, including commercial real estate, commercial and industrial, home equity, consumer installment and other loans. Many of our loans are secured by real estate (both residential and commercial) within our market area. A major change in the real estate market, such as deterioration in the value of collateral, or in the local or national economy, could affect our customers’ ability to pay these loans, resulting in loan defaults and the possible impairments in the value of our collateral, which in turn could impact our results of operations and financial condition. Additionally, increases in unemployment also may affect the ability of certain clients to repay loans and the financial results of commercial clients in localities with higher unemployment, may result in loan defaults and foreclosures and may impair the value of our collateral. We cannot fully eliminate credit risk, and as a result, credit losses may increase in the future. The extent of such impact cannot be determined at this time and may be muted by the Bank’s implementation of hardship relief programs that include payment deferral and short-term funding options.

~~The Bank’s participation in the~~ ~~PPP~~ ~~may result in operational, credit or other shortfalls that may adversely affect our financial condition, results of operations, and future prospects.~~

In response to the COVID-19 pandemic, President Trump signed into law the CARES Act on March 27, 2020. Among other things, the CARES Act created a new facility, titled the “Paycheck Protection Program,” to the SBA’s 7(a) Loan Program. The small business loans are provided through participating financial institutions, such as the Bank, that process loan applications and service the loans. During the three months ended June 30, 2020, we funded 922 loans totaling $98.3 million in of PPP loans. Due to the accelerated implementation of the PPP, the Bank, like other financial institutions, has funded loans under the PPP as the SBA and U.S. Department of Treasury release guidance, nearly daily, on the operational and logistical functions of the program. There are several aspects of the PPP that have not yet been addressed by the SBA or U.S. Department of Treasury, including how forgiveness on loans under the program will be calculated. We cannot predict what operational, credit, or other shortfalls may arise as a result of the Bank making loans under the PPP or how such shortfalls may adversely affect our financial condition, results of operations and future prospects. Moreover, every PPP borrower is in a challenging financial position that may negatively impact their ability to repay if the loans are not subject to forgiveness. The borrowers may not be able to repay the loans when the COVID-19 pandemic subsides and they may not maintain the level of employees and salary levels required for forgiveness. If the borrowers are unable to repay their loans or the federal government does not pay timely the amounts that it would owe the Bank pursuant to the terms of the loans, the guarantees and the PPP, the Company’s business, financial condition and results of operations could be adversely affected.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Series B preferred stock, $0.01 par value per share	TECTP	The Nasdaq Stock Market, LLC

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

		Emerging growth company	☒

PART I. FINANCIAL INFORMATION		Page
Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets as of June 30, ~~2020~~2021 and December 31, ~~2019~~2020	3
	Consolidated Statements of Income for the Three and Six Months Ended June 30, ~~2020~~2021 and ~~2019~~2020	4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, ~~2020~~2021 and ~~2019~~2020	5
	Consolidated Statements of Changes in ~~Shareholders'~~Shareholders’ Equity for the Three and Six Months Ended June 30, ~~2020~~2021 and ~~2019~~2020	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, ~~2020~~2021 and ~~2019~~2020	7
	Notes to Consolidated Financial Statements	8
Item 2.	~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	3330
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5452
Item 4.	Controls and Procedures	5653

PART II. OTHER INFORMATION		5754
Item 1.	Legal Proceedings	5754
Item 1A.	Risk Factors	5754
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5954
Item 3.	Defaults upon Senior Securities	5954
Item 4.	Mine Safety Disclosures	5954
Item 5.	Other Information	6054
Item 6.	Exhibits	6054

SIGNATURES		6155

	June 30, 2020		December 31, 2019
(In thousands, except share amounts)	(Unaudited)
ASSETS
Cash and due from banks	$	4,870	$	5,669
Interest-bearing deposits		74,968		13,828
Federal funds sold		357		706
Total cash and cash equivalents		80,195		20,203
Securities available for sale		13,030		12,677
Securities held to maturity		5,827		6,349
Securities, restricted at cost		2,429		2,417
Securities, not readily marketable		100		100
Loans held for sale		11,625		9,894
Loans, net of allowance for loan losses of $2,548 and $1,408, respectively		392,221		289,671
Bank premises and equipment, net		4,987		5,200
Core deposit intangible, net		1,079		1,180
Goodwill		10,729		10,729
Other assets		7,653		6,637
Total assets	$	529,875	$	365,057

LIABILITIES
Demand deposits:
Non-interest-bearing	$	73,964	$	33,890
Interest-bearing		123,820		65,359
Time deposits		224,990		184,352
Total deposits		422,774		283,601
Borrowed funds		33,886		12,000
Subordinated notes		12,000		12,000
Deferred tax liabilities		351		194
Other liabilities		6,534		6,787
Total liabilities		475,545		314,582

SHAREHOLDERS’ EQUITY

Preferred stock, 9.00% fixed to floating rate Series B non-cumulative, perpetual ($0.01 par value; 1,725,000 shares authorized, issued and outstanding at June 30, 2020 and December 31, 2019)		17		17
Common stock ($0.01 par value; 40,000,000 shares authorized; 6,568,750 shares issued and outstanding at June 30, 2020 and December 31, 2019)		66		66
Additional paid-in capital		39,095		39,050
Retained earnings		15,027		11,288
Accumulated other comprehensive income		125		54
Total shareholders’ equity		54,330		50,475
Total liabilities and shareholders’ equity	$	529,875	$	365,057

	June 30, 2021			December 31, 2020
(In thousands, except share amounts)	(Unaudited)
ASSETS
Cash and due from banks	$	4,758		$	7,515
Interest-bearing deposits		74,615			38,579
Federal funds sold		495			774
Total cash and cash equivalents		79,868			46,868
Securities available for sale		17,933			17,396
Securities held to maturity		2,784			5,776
Securities, restricted at cost		2,431			2,431
Securities, not readily marketable		100			100
Loans held for sale		21,147			14,864
Loans, net of allowance for loan losses of $3,307 and $2,941, respectively		407,504			397,601
Bank premises and equipment, net		4,691			4,849
Core deposit intangible, net		878			979
Goodwill		10,729			10,729
Deferred tax asset		290			83
Other assets		9,067			11,750
Total assets	$	557,422		$	513,426

LIABILITIES
Demand deposits:
Non-interest-bearing	$	77,835		$	57,112
Interest-bearing		128,925			116,278
Time deposits		177,236			174,625
Total deposits		383,996			348,015
Borrowed funds		87,544			83,690
Subordinated notes		12,000			12,000
Other liabilities		7,082			9,708
Total liabilities		490,622			453,413

SHAREHOLDERS’ EQUITY

Preferred stock, 9.00% fixed to floating rate Series B non-cumulative, perpetual ($0.01 par value; 1,725,000 shares authorized, issued and outstanding at June 30, 2021 and December 31, 2020)		17			17
Common stock ($0.01 par value; 40,000,000 shares authorized; 6,568,750 shares issued and outstanding at June 30, 2021 and December 31, 2020)		66			66
Additional paid-in capital		39,364			39,201
Retained earnings		27,489			20,661
Accumulated other comprehensive (loss) income		(136	)		68
Total shareholders’ equity		66,800			60,013
Total liabilities and shareholders’ equity	$	557,422		$	513,426

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share data and share amounts)	2020		2019		2020		2019
Interest Income
Loan, including fees	$	4,493	$	4,174	$	9,234	$	8,005
Securities		210		205		522		414
Federal funds sold		-		3		2		6
Interest-bearing deposits		19		84		80		149
Total interest income		4,722		4,466		9,838		8,574
Interest Expense
Deposits		1,213		1,198		2,471		2,344
Borrowed funds		246		284		487		574
Total interest expense		1,459		1,482		2,958		2,918
Net interest income		3,263		2,984		6,880		5,656
Provision for loan losses		475		400		1,263		483
Net interest income after provision for loan losses		2,788		2,584		5,617		5,173
Non-interest Income
Trust income		1,196		1,250		2,472		2,431
Gain on sale of loans		-		-		432		-
Advisory income		2,311		2,466		4,805		4,668
Brokerage income		1,790		2,894		3,861		4,956
Service fees and other income		1,222		1,096		2,959		2,734
Rental income		57		81		148		163
Total non-interest income		6,576		7,787		14,677		14,952
Non-interest Expense
Salaries and employee benefits		4,049		4,869		8,953		9,252
Occupancy and equipment		585		636		1,210		1,249
Trust expenses		372		499		927		976
Brokerage and advisory direct costs		560		451		1,046		870
Professional fees		284		418		676		863
Data processing		202		220		401		449
Other		611		679		1,273		1,309
Total non-interest expense		6,663		7,772		14,486		14,968
Income before Income Taxes		2,701		2,599		5,808		5,157
Income tax expense		587		407		1,293		771
Net Income		2,114		2,192		4,515		4,386
Preferred stock dividends		388		204		776		405
Net income available to common stockholders	$	1,726	$	1,988	$	3,739	$	3,981

Earnings per common share:
Basic	$	0.26	$	0.30	$	0.57	$	0.61
Diluted		0.26		0.30		0.57		0.61

Weighted average common shares outstanding		6,568,750		6,568,750		6,568,750		6,568,750
Weighted average diluted shares outstanding		6,568,750		6,568,750		6,568,750		6,568,750

(In thousands)	Series A Preferred Stock		Series B Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance at January 1, 2019	$	1	$	-	$	66	$	31,485	$	6,130		$	(209	)	$	37,473
Distributions prior to Tectonic Merger		-		-		-		-		(650	)		-			(650	)
Dividends paid on Series A preferred stock		-		-		-		-		(201	)		-			(201	)
Net income		-		-		-		-		2,194			-			2,194
Other comprehensive income		-		-		-		-		-			155			155
Stock based compensation		-		-		-		24		-			-			24
Balance at March 31, 2019		1		-		66		31,509		7,473			(54	)		38,995
Issuance of 9.00% fixed-to-floating rate Series B non-cumulative perpetual preferred stock		-		17		-		15,489		-			-			15,506
Distributions prior to Tectonic Merger		-		-		-		-		(650	)		-			(650	)
Dividends paid on Series A preferred stock		-		-		-		-		(204	)		-			(204	)
Net income		-		-		-		-		2,192			-			2,192
Other comprehensive income		-		-		-		-		-			110			110
Stock based compensation		-		-		-		34		-			-			34
Balance at June 30, 2019	$	1	$	17	$	66	$	47,032	$	8,811		$	56		$	55,983

Balance at January 1, 2020	$	-	$	17	$	66	$	39,050	$	11,288		$	54		$	50,475
Dividends paid on Series B preferred stock		-		-		-		-		(388	)		-			(388	)
Net income		-		-		-		-		2,401			-			2,401
Other comprehensive income		-		-		-		-		-			54			54
Stock based compensation		-		-		-		24		-			-			24
Balance at March 31, 2020		-		17		66		39,074		13,301			108			52,566
Dividends paid on Series B preferred stock		-		-		-		-		(388	)		-			(388	)
Net income		-		-		-		-		2,114			-			2,114
Other comprehensive income		-		-		-		-		-			17			17
Stock based compensation		-		-		-		21		-			-			21
Balance at June 30, 2020	$	-	$	17	$	66	$	39,095	$	15,027		$	125		$	54,330

(In thousands)	Series B Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance at January 1, 2020	$	17	$	66	$	39,050	$	11,288		$	54		$	50,475
Dividends paid on Series B preferred stock		-		-		-		(388	)		-			(388	)
Net income		-		-		-		2,401			-			2,401
Other comprehensive income		-		-		-		-			54			54
Stock based compensation		-		-		24		-			-			24
Balance at March 31, 2020		17		66		39,074		13,301			108			52,566
Dividends paid on Series B preferred stock		-		-		-		(388	)		-			(388	)
Net income		-		-		-		2,114			-			2,114
Other comprehensive income		-		-		-		-			17			17
Stock based compensation		-		-		21		-			-			21
Balance at June 30, 2020	$	17	$	66	$	39,095	$	15,027		$	125		$	54,330

Balance at January 1, 2021	$	17	$	66	$	39,201	$	20,661		$	68		$	60,013
Dividends paid on Series B preferred stock		-		-		-		(388	)		-			(388	)
Net income		-		-		-		4,298			-			4,298
Other comprehensive loss		-		-		-		-			(229	)		(229	)
Stock based compensation		-		-		85		-			-			85
Balance at March 31, 2021		17		66		39,286		24,571			(161	)		63,779
Dividends paid on Series B preferred stock		-		-		-		(388	)		-			(388	)
Dividends paid on common stock								(411	)					(411	)
Net income		-		-		-		3,717			-			3,717
Other comprehensive income		-		-		-		-			25			25
Stock based compensation		-		-		78		-			-			78
Balance at June 30, 2021	$	17	$	66	$	39,364	$	27,489		$	(136	)	$	66,800

	Six Months Ended June 30,
(In thousands)	2020			2019
Cash Flows from Operating Activities
Net income	$	4,515		$	4,386
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses		1,263			483
Depreciation and amortization		253			317
Accretion of discount on loans		(43	)		(6	)
Core deposit intangible amortization		101			101
Securities premium amortization, net		24			40
Origination of loans held for sale		(15,616	)		(14,413	)
Proceeds from payments and sales of loans held for sale		6,736			186
Gain on sale of loans		(432	)		-
Stock based compensation		45			58
Deferred income taxes		138			(110	)
Servicing asset amortization		251			485
Net change in:
Other assets		(1,186	)		(375	)
Other liabilities		(253	)		502
Net cash used in operating activities		(4,204	)		(8,346	)
Cash Flows from Investing Activities
Acquisition of business		-			(2,500	)
Purchase of securities available for sale		(158,043	)		(149,969	)
Principal payments, calls and maturities of securities available for sale		157,771			150,737
Principal payments of securities held to maturity		507			230
Purchase of securities, restricted		(4,112	)		(5,323	)
Proceeds from sale of securities, restricted		4,100			5,309
Proceeds from sale of real estate owned		-			275
Net change in loans		(96,281	)		(7,082	)
Purchases of premises and equipment		(29	)		(112	)
Net cash used in investing activities		(96,087	)		(8,435	)
Cash Flows from Financing Activities
Net change in demand deposits		98,535			376
Net change in time deposits		40,638			498
Proceeds from borrowed funds		215,119			210,559
Repayment of borrowed funds		(193,233	)		(207,474	)
Distributions to Tectonic Holdings members prior to Tectonic Merger		-			(1,300	)
Proceeds from issuance of preferred stock		-			15,506
Dividends paid on Series A preferred shares		-			(296	)
Dividends paid on Series B preferred shares		(776	)		-
Net cash provided by financing activities		160,283			17,869
Net change in cash and cash equivalents		59,992			1,088
Cash and cash equivalents at beginning of period		20,203			18,458
Cash and cash equivalents at end of period	$	80,195		$	19,546

Non Cash Transactions
Transfers from loans to other real estate owned	$	-		$	275
Lease liabilities incurred in exchange for right-of-use assets	$	118		$	241
Dividends accrued on Series A preferred shares	$	-		$	109
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest	$	2,965		$	2,927
Income taxes	$	-		$	480

	Three months ended June 30,				Six months ended June 30,
(In thousands, except per share data)	2020		2019		2020		2019
Net income available to common shareholders	$	1,726	$	1,988	$	3,739	$	3,981
Average shares outstanding		6,569		6,569		6,569		6,569
Effect of common stock-based compensation		-		-		-		-

Average diluted shares outstanding		6,569		6,569		6,569		6,569

Basic earnings per share	$	0.26	$	0.30	$	0.57	$	0.61
Diluted earnings per share	$	0.26	$	0.30	$	0.57	$	0.61

(In thousands)	May 13, 2019
Assets
Cash and cash equivalents	$	5,601
Securities, not readily marketable, at cost		100
Premises and equipment, net		761
Other assets		5,369
Total assets	$	11,831

Liabilities
Other liabilities	$	2,942
Total liabilities		2,942

Shareholders’ Equity
Preferred stock, 10.0% Series A non-cumulative, perpetual ($0.01 par value; 80,338 shares authorized, 80,338 shares issued and outstanding at May 13, 2019)		1
Additional paid-in capital		8,033
Retained earnings		855
Total shareholders’ equity		8,889
Total liabilities and shareholders’ equity	$	11,831

	June 30, 2020
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities available for sale:
U.S. government agencies	$	10,091	$	68	$	2		$	10,157
Mortgage-backed securities		2,781		92		-	��		2,873
Total securities available for sale	$	12,872	$	160	$	2		$	13,030

Securities held to maturity:
Property assessed clean energy	$	5,827	$	-	$	-		$	5,827
Securities, restricted:
Other	$	2,429	$	-	$	-		$	2,429

Securities not readily marketable	$	100	$	-	$	-		$	100

	December 31, 2019
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available for sale:
U.S. government agencies	$	10,684	$	83	$	36	$	10,731
Mortgage-backed securities		1,925		21		-		1,946
Total securities available for sale	$	12,609	$	104	$	36	$	12,677

Securities held to maturity:
Property assessed clean energy	$	6,349	$	-	$	-	$	6,349

Securities, restricted:
Other	$	2,417	$	-	$	-	$	2,417

Securities not readily marketable	$	100	$	-	$	-	$	100

	Less than 12 months				12 months or longer				Total
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. government agencies	$	2,000	$	2	$	-	$	-	$	2,000	$	2

	Less than 12 months				12 months or longer				Total
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. government agencies	$	13,656	$	203	$	1,968	$	32	$	15,624	$	235

	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total				Average		Interest
	Principal		With No		With		Recorded		Related		Recorded		Income
(In thousands)	Balance		Allowance		Allowance		Investment		Allowance		Investment		Recognized
June 30, 2020											Six Months Ended
Commercial and industrial	$	-	$	-	$	-	$	-	$	-	$	20	$	-
SBA		6,666		3,050		-		3,050		-		3,406		61
Total	$	6,666	$	3,050	$	-	$	3,050	$	-	$	3,426	$	61

December 31, 2019											Year Ended
Commercial and industrial	$	70	$	60	$	-	$	60	$	-	$	62	$	-
SBA		6,523		5,931		-		5,931		-		4,091		287
Total	$	6,593	$	5,991	$	-	$	5,991	$	-	$	4,153	$	287

	Available for Sale				Held to Maturity
(In thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	163	$	163	$	0	$	0
Due after one year through five years		1,087		1,078		0		0
Due after five years through ten years		11,188		11,061		0		0
Due after ten years		3,702		3,611		2,784		2,784
Mortgage-backed securities		1,966		2,020		0		0
Total	$	18,106	$	17,933	$	2,784	$	2,784

	Available for Sale				Held to Maturity
(In thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due after one year through five years	$	1,799	$	1,810	$	556	$	556
Due after five years through ten years		7,000		7,030		2,479		2,479
Due after ten years		1,292		1,317		2,792		2,792
Mortgage-backed securities		2,780		2,873		-		-
Total	$	12,871	$	13,030	$	5,827	$	5,827

(In thousands)	June 30, 2020		December 31, 2019
Non-accrual loans:
Commercial and industrial	$	-	$	60
Real estate - commercial		163		-
SBA guaranteed		1,118		4,892
SBA unguaranteed		575		1,039
Total	$	1,856	$	5,991

	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total					Average		Interest
	Principal		With No		With		Recorded		Related			Recorded		Income
(In thousands)	Balance		Allowance		Allowance		Investment		Allowance			Investment		Recognized
June 30, 2021												Six Months Ended
Commercial and industrial	$	98	$	98	$	0	$	98	$	0		$	66	$	2
SBA		10,790		7,226		0		7,226		0			6,397		21
Total	$	10,888	$	7,324	$	0	$	7,324	$	0		$	6,463	$	23

December 31, 2020												Year Ended
Commercial and industrial	$	0	$	0	$	0	$	0	$	0		$	10	$	0
Real estate – construction and land		0		0		0		0		0			313		0
SBA		6,649		2,976		0		2,976		0			3,206		61
Total	$	6,649	$	2,976	$	0	$	2,976	$	0	��	$	3,529	$	61

	30-89 Days		90 Days or More		Total		Total		Total		Total 90 Days Past Due
(In thousands)	Past Due		Past Due		Past Due		Current		Loans		Still Accruing
June 30, 2020
Commercial and industrial	$	-	$	-	$	-	$	86,311	$	86,311	$	-
Consumer installment		-		-		-		5,717		5,717		-
Real estate – residential		-		-		-		4,999		4,999		-
Real estate – commercial		-		87		87		49,995		50,082		-
Real estate – construction and land		-		-		-		10,160		10,160		-
SBA		-		1,693		1,693		235,007		236,700		-
USDA		-		-		-		799		799		-
Other		-		-		-		1		1		-
Total	$	-	$	1,780	$	1,780	$	392,989	$	394,769	$	-

December 31, 2019
Commercial and industrial	$	571	$	-	$	571	$	84,905	$	85,476	$	-
Consumer installment		-		-		-		3,409		3,409		-
Real estate – residential		-		-		-		5,232		5,232		-
Real estate – commercial		521		-		521		46,460		46,981		-
Real estate – construction and land		-		-		-		7,865		7,865		-
SBA		-		5,931		5,931		133,755		139,686		-
USDA		-		-		-		2,430		2,430		-
Other		-		-		-		-		-		-
Total	$	1,092	$	5,931	$	7,023	$	284,056	$	291,079	$	-

											Total 90
	30-89 Days		90 Days or		Total		Total		Total		Days Past Due
(In thousands)	Past Due		More Past Due		Past Due		Current		Loans		Still Accruing
June 30, 2021
Commercial and industrial	$	0	$	0	$	0	$	81,446	$	81,446	$	0
Consumer installment		0		0		0		3,773		3,773		0
Real estate – residential		214		0		214		5,122		5,336		0
Real estate – commercial		0		154		154		52,672		52,826		0
Real estate – construction and land		0		0		0		7,498		7,498		0
SBA		0		518		518		258,611		259,129		0
USDA		0		0		0		803		803		0
Total	$	214	$	672	$	886	$	409,925	$	410,811	$	0

December 31, 2020
Commercial and industrial	$	0	$	0	$	0	$	79,864	$	79,864	$	0
Consumer installment		0		0		0		10,259		10,259		0
Real estate – residential		0		0		0		4,319		4,319		0
Real estate – commercial		121		158		279		44,205		44,484		0
Real estate – construction and land		0		0		0		8,396		8,396		0
SBA		0		1,635		1,635		250,784		252,419		0
USDA		0		0		0		801		801		0
Total	$	121	$	1,793	$	1,914	$	398,628	$	400,542	$	0

			Pass-		Special
(In thousands)	Pass		Watch		Mention		Substandard		Doubtful		Total
June 30, 2020
Commercial and industrial	$	85,637	$	515	$	-	$	159	$	-	$	86,311
Consumer installment		5,717		-		-		-		-		5,717
Real estate – residential		4,999		-		-		-		-		4,999
Real estate – commercial		49,918		-		-		164		-		50,082
Real estate – construction and land		10,160		-		-		-		-		10,160
SBA		229,037		3,948		2,689		1,026		-		236,700
USDA		799		-		-		-		-		799
Other		1		-		-		-		-		1
Total	$	386,268	$	4,463	$	2,689	$	1,349	$	-	$	394,769

December 31, 2019
Commercial and industrial	$	84,838	$	578	$	-	$	60	$	-	$	85,476
Consumer installment		3,409		-		-		-		-		3,409
Real estate – residential		5,232		-		-		-		-		5,232
Real estate – commercial		46,981		-		-		-		-		46,981
Real estate – construction and land		7,865		-		-		-		-		7,865
SBA		127,004		9,506		2,137		1,039		-		139,686
USDA		2,430		-		-		-		-		2,430
Other		-		-		-		-		-		-
Total	$	277,759	$	10,084	$	2,137	$	1,099	$	-	$	291,079

(In thousands)	Pass		Pass- Watch		Special Mention			Substandard		Doubtful		Total
June 30, 2021
Commercial and industrial	$	80,911	$	437	$	0		$	98	$	0	$	81,446
Consumer installment		3,773		0		0			0		0		3,773
Real estate – residential		5,122		0		0	��		214		0		5,336
Real estate – commercial		52,672		0		0			154		0		52,826
Real estate – construction and land		7,498		0		0			0		0		7,498
SBA		251,938		1,631		2,287			3,273		0		259,129
USDA		803		0		0			0		0		803
Total	$	402,717	$	2,068	$	2,287		$	3,739	$	0	$	410,811

December 31, 2020
Commercial and industrial	$	79,134	$	730	$	0		$	0	$	0	$	79,864
Consumer installment		10,259		0		0			0		0		10,259
Real estate – residential		4,319		0		0			0		0		4,319
Real estate – commercial		44,326		0		0			158		0		44,484
Real estate – construction and land		8,396		0		0			0		0		8,396
SBA		243,533		5,242		1,794			1,850		0		252,419
USDA		801		0		0			0		0		801
Total	$	390,768	$	5,972	$	1,794		$	2,008	$	0	$	400,542

(In thousands)	Commercial and Industrial		Consumer Installment			Real Estate Residential		Real Estate Commercial		Real Estate Construction and Land		SBA			USDA		Other		Total
Three months ended:
June 30, 2020
Beginning Balance	$	955	$	75		$	43	$	575	$	138	$	435		$	-	$	-	$	2,221
Provision for loan losses		144		15			15		112		41		148			-		-		475
Charge-offs		-		-			-		-		-		(149	)		-		-		(149	)
Recoveries		-		-			-		-		-		1			-		-		1
Net charge-offs		-		-			-		-		-		(148	)		-		-		(148	)
Ending balance	$	1,099	$	90		$	58	$	687	$	179	$	435		$	-	$	-	$	2,548

June 30. 2019
Beginning Balance	$	423	$	27		$	20	$	225	$	38	$	206		$	-	$	-	$	939
Provision for loan losses		41		(1	)		8		43		16		293			-		-		400
Charge-offs		-		-			-		-		-		(248	)		-		-		(248	)
Recoveries		-		-			-		-		-		16			-		-		16
Net charge-offs		-		-			-		-		-		(232	)		-		-		(232	)
Ending balance	$	464	$	26		$	28	$	268	$	54	$	267		$	-	$	-	$	1,107

2020	$	377
2021		429
2022		175
2023		76
2024 and thereafter		7
Total minimum rental payments		1,064

Less: Minimum sublease rentals		(63	)
Net minimum rental payments		1,001
Less: Interest		14
Present value of lease liabilities	$	1,015

(In thousands)
2020 remaining	$	101
2021		201
2022		208
2023		210
2024		210
Thereafter		149
Total	$	1,079

(In thousands)
2021 remaining	$	101
2022		208
2023		210
2024		210
2025		149
Total	$	878

(In thousands, except percentages)	June 30, 2020				December 31, 2019
Non-interest bearing demand	$	73,964	17	%	$	33,890	12	%
Interest-bearing demand (NOW)		4,887	1			4,546	1
Money market accounts		113,570	27			56,144	20
Savings accounts		5,363	1			4,669	2
Time deposits $100,000 and over		218,026	52			178,004	63
Time deposits under $100,000		6,964	2			6,348	2
Total	$	422,774	100	%	$	283,601	100	%

(In thousands)
2020	$	84,587
2021		82,511
2022		30,474
2023		15,561
2024		6,104
Thereafter		5,753
Total	$	224,990

(In thousands)
2021	$	57,366
2022		89,836
2023		16,805
2024		7,234
2025		5,503
Thereafter		492
Total	$	177,236

	BASEL III Minimum for Capital Adequacy Requirements			BASEL III Additional Capital Conservation Buffer			BASEL III Ratio with Capital Conservation Buffer
Total Risk Based Capital (total capital to risk weighted assets)		8.0	%		2.5	%		10.5	%
Tier 1 Risk Based Capital (tier 1 to risk weighted assets)		6.0	%		2.5	%		8.5	%
Common Equity Tier 1 Risk Based ( CET1 to risk weighted assets)		4.5	%		2.5	%		7.0	%
Tier 1 Leverage Ratio (tier 1 to average assets)		4.0	%		-	%		4.0	%

	BASEL III Minimum for Capital Adequacy Requirements			BASEL III Additional Capital Conservation Buffer			BASEL III Ratio with Capital Conservation Buffer
Total Risk Based Capital (total capital to risk weighted assets)		8.0	%		2.5	%		10.5	%
Tier 1 Risk Based Capital (tier 1 to risk weighted assets)		6.0	%		2.5	%		8.5	%
Common Equity Tier 1 Risk Based ( CET1 to risk weighted assets)		4.5	%		2.5	%		7.0	%
Tier 1 Leverage Ratio (tier 1 to average assets)		4.0	%		0	%		4.0	%

	Actual					Minimum Capital Required - Basel III					Required to be Considered Well Capitalized
(In thousands, except percentages)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2020
Total Capital (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)	$	44,748		17.04	%	$	27,568		10.50	%	$	26,255		10.00	%
T Bank, N.A.		44,632		17.15			27,329		10.50			26,028		10.00
Tier 1 Capital (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)		42,200		16.07			22,317		8.50			21,004		8.00
T Bank, N.A.		42,084		16.17			22,124		8.50			20,822		8.00
Common Equity Tier 1 (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)		24,950		9.50			18,379		7.00			17,066		6.50
T Bank, N.A.		42,084		16.17			18,219		7.00			16,918		6.50
Tier 1 Capital (to Average Assets)
Tectonic Financial, Inc. (consolidated)		42,200		9.01			18,737		4.00			23,422		5.00
T Bank, N.A.		42,084		9.09			18,512		4.00			23,140		5.00

As of December 31, 2019
Total Capital (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)	$	39,709	15.47	%	$	26,950	10.50	%	$	25,667	10.00	%
T Bank, N.A.		39,949	15.71			26,699	10.50			25,428	10.00
Tier 1 Capital (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)		38,301	14.92			21,817	8.50			20,534	8.00
T Bank, N.A.		38,541	15.16			21,614	8.50			20,342	8.00
Common Equity Tier 1 (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)		21,051	8.20			17,967	7.00			16,683	6.50
T Bank, N.A.		38,541	15.16			17,800	7.00			16,528	6.50
Tier 1 Capital (to Average Assets)
Tectonic Financial, Inc. (consolidated)		38,301	11.20			13,679	4.00			17,099	5.00
T Bank, N.A.		38,541	11.09			13,899	4.00			17,373	5.00

	Actual					Minimum Capital Required - Basel III					Required to be Considered Well Capitalized
(In thousands, except percentages)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2021
Total Capital (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)	$	58,497		20.85	%	$	29,462		10.50	%	$	28,059		10.00	%
T Bank, N.A.		56,590		20.34			29,214		10.50			27,823		10.00
Tier 1 Capital (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)		55,190		19.67			23,850		8.50			22,447		8.00
T Bank, N.A.		53,283		19.15			23,650		8.50			22,258		8.00
Common Equity Tier 1 (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)		37,940		13.52			19,641		7.00			18,238		6.50
T Bank, N.A.		53,283		19.15			19,476		7.00			18,085		6.50
Tier 1 Capital (to Average Assets)
Tectonic Financial, Inc. (consolidated)		55,190		12.43			17,755		4.00			22,194		5.00
T Bank, N.A.		53,283		12.18			17,496		4.00			21,870		5.00

As of December 31, 2020
Total Capital (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)	$	50,987		18.22	%	$	29,379		10.50	%	$	27,980		10.00	%
T Bank, N.A.		50,012		18.25			28,782		10.50			27,411		10.00
Tier 1 Capital (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)		48,046		17.17			23,783		8.50			22,384		8.00
T Bank, N.A.		47,071		17.17			23,299		8.50			21,929		8.00
Common Equity Tier 1 (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)		30,796		11.01			19,586		7.00			18,187		6.50
T Bank, N.A.		47,071		17.17			19,188		7.00			17,817		6.50
Tier 1 Capital (to Average Assets)
Tectonic Financial, Inc. (consolidated)		48,046		11.66			16,480		4.00			20,601		5.00
T Bank, N.A.		47,071		11.58			16,257		4.00			20,322		5.00